Creating a budget or learning how to create a budget seems easy on the surface but it’s also important to keep in mind some of the basics of budgeting. As a simple example of budgeting, let’s say you are allotted $2,500 per month. What do you need to pay for? At the very least, you need to account for where you live (house, apartment, etc), the food you eat, the vehicle or means of transportation you take, health care, any debt payments and maybe some entertainment or “fun” spending. How do you know what you can spend each month and how do you know what you can afford? Simple, budgeting.
How do you set up a budget? Here are 5 things to consider:
Budgeting Step #1: What Is Your Income After Taxes?
After tax income is the key here. If you work for yourself or are what’s considered a 1099 employee, you most likely don’t have your taxes automatically accounted for so it’s important to set aside your tax money owed before you put your budget together. Also, if you are employed by a company that issues you a regular paycheck, your after tax income will also take into account the money left over after automatic deductions are made from thinks like a 401(k), health insurance, life insurance, and other automatic deductions. Once you take all of this into account, you’re left with your after tax income.
Budgeting Step #2: Choose Your Strategy
A basic budget should cover your basic needs. Covering the cost of your housing, daily travel (automobile or public transportation costs), food and utilities should be covered at the very least. But most budgets will also include savings for “a rainy day”. When life throws financial curve balls, it’s important to have something set aside for these unforeseen expenses. If you get a flat tire, if you run into unforeseen health issues, unexpected travel expenses or anything else you can think of that may not be part of your usual monthly accounting can be included in this “side pot” of money.
Budgeting Step #3: Stay On Top Of Your Strategy & Track Your Results
Having a basic budget is the focus here but you also need to apply your strategy and track its performance. Just like any investment you make into the stock market today, you want to track the progress. Just like an investment that returns bad results, you don’t want to hold onto bad budgeting habits. Once you have your strategy outlined, you want to both apply that strategy and track results. If, for example you find that each month you’re having a hard time paying certain bills, it may be time to either adjust your lifestyle (downsize or decrease entertainment spending) or find a way to make more money.
Budgeting Step #4: Automate
Many financial planners will tell you to try and automate as much as possible. But when it comes to how to budget, what does this mean? Essentially, this step involves you making as many payments automated as possible with minimal effort made on your part. Making sure you hold yourself accountable for your expenses is just as important. Setting up automatic payments for things like rent, car payments, health insurance and more can help you budget better as you’ll know exactly what is outgoing at the beginning of the month.
Budgeting Step #5: Readjust As Life Readjusts
Your budget doesn’t and shouldn’t be set in stone. Our lives change both for the better and the worse. When life has major changes, you should make sure to revisit your budget. At the very least, even if life doesn’t have major changes, you should revisit your budget once a year to make sure things are still in line with your original strategy. When priorities change, your budget should also be something to reconsider. Life events like having children, taking on a new job, getting a raise, losing your job, increased or decreased health expenses, a big move to a different location and more are good reasons to revisit your budgeting strategy.