It’s a new year and you’ve decided to get serious about your finances. One area you want to work on is budgeting. But what is a budget and how can you make it work for you? Let’s look at some budgeting basics.
What Is a Budget?
Think of a budget as an organizational tool for your income. When you create a budget, each bit of your income has a spot where it goes. For example, 35% of your income main go to housing expenses and 20% may go to savings. In other words, instead of getting your paycheck and sending money to random places, you have a spot for that money to go. If you want a more technical definition, Investopedia defines a budget as – “estimation of income and expenses over a specified future period of time.” In other words, it’s looking at how much money you have to pay your expenses.
What Should a Budget Look Like?
The exact look of a budget varies from person to person. We all have different expenses. Also, some people prefer a broader budget than others. For example, some people use a 50/20/30 budget in which 50% goes to living expenses and essentials, 20% goes to financial goals (such as paying off debt), and 30% is for flexible spending (personal shopping, going to movies, etc.). Other people prefer to break their budget down even further.
Why Should I Track My Expenses?
Chances are you’ve heard people talk about the need to track expenses before you create a budget. This is because you need to know where your money is going. For example, with groceries, you need to know how much your family spends on groceries before you can create a budget. This makes sure you’re budgeting enough money for necessary expenses. You’ll want to track your expenses for at least two months to get an idea of what your expenses are.
Why Do I Need to Update a Budget?
Expenses change from month to month. For example, your budget will look quite different during December than it does in March. We all have months where we spend more than others. When one of those months is coming up, you need to adjust your budget to take into account the extra money that will be spent.
Why Do I Need to Pay Myself?
People who want to get serious about their finances usually become too strict. They focus all of their income into paying off debt or saving money, but don’t pay themselves (or allow themselves a few splurges). This is a recipe for disaster. You must pay yourself or you won’t stick to your budget. It will begin to feel as though you have nothing to show for all your hard work. Make sure you pay yourself.
Budgeting your income is a great way to get your finances in order. Take the time to create a realistic budget after knowing where your money is going each month. And, remember to pay yourself. Just because you want to have financial stability doesn’t mean you can’t still have fun.
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