Budgeting is a crucial step toward a healthy financial life. It allows you to look at your monthly income and create a clear action plan of what you will do with your money before you spend it. Whether you’re planning to pay down debt, save for retirement, or tame your spending on groceries every month, budgeting can help you achieve your financial goals faster.
Know Your Income
All budgeting starts with knowing your monthly after-tax income, also known as your “take-home” pay. Getting a complete picture of where your money comes from will help you create the foundation for setting your spending and savings goals. Begin by identifying how much money you can expect to bring into your household each month.
Choose Your Budgeting Strategy
Budgeting can feel like an overwhelming task for some people. But keep in mind that the best budgeting method is the one that works for you. “There are many great ways to budget, but each plays to different skill sets and financial goals. So don’t feel like you have to conform to a strict method,” Kari Lorz, a Certified Financial Education Instructor (CFEI) and founder of Money for the Mamas, told The Balance in an email interview.
If you’re looking for a simple budgeting method, the 50/30/20 budgeting strategy may be worth a try. It works by splitting your monthly income into three categories: needs, wants, and savings.
The cash envelope strategy works well for people who prefer a more concrete, hands-on budgeting system to help get spending under control.
This technique involves labeling envelopes based on your budget categories—for example, groceries, utilities, and transportation. You then separate actual cash into each envelope. Once the money is gone, that’s all you can spend on that item for the month. This method can create an acute awareness of where your money is going, making it much harder to overspend.
Give Yourself a Margin
Always trying to keep track of every dime you spend can feel tedious. So setting aside a certain amount of money to be your margin of error every month is a way of creating breathing room in your budget. “A margin is the secret sauce for maintaining a monthly budget andachieving your financial goals,” Damian Dunn, Certified Financial Planner (CFP) and Vice President of Advice with Your Money Line, told The Balance in an email interview.
Use a Budgeting App
When you need extra help staying on top of your spending, a budgeting app can help you track your money right from the palm of your hand. The right app for you is one whose features and costs best suit your financial needs.
Track Your Progress
At its core, budgeting is simply a spending plan. Keep track of your spending to see what’s working, where you’re struggling, and where your money is going. In the beginning, it may help to track your spending on a daily or weekly basis, and assess your budgeting method every month or so. Once you’ve settled on a method you think works, you can make assessments after longer intervals.
Sticking to a budget can be tricky, and being restrictive doesn’t help. If your budget doesn’t have any margin for error or you’re too hard on yourself, you might get so frustrated that you give up on your budget. You should also make sure to track your spending, set money aside for an emergency fund, and review your budget regularly to make sure it’s up-to-date.
This article was culled from Thebalance.com