Budgeting isn’t really a skill taught in school these days, and many young adults, and even not-so-young adults were never given the opportunity to learn to budget properly. Without this skill, many find themselves living paycheck to paycheck and money tends to just flow out of their hands. Budgeting can help lead to financial stability, living within one’s means, and reducing end-of-month financial panic. Here are our key steps to learning to budget.
- Identify Income and Expenses
You can use just plain old paper and pencil for this, or if you’re tech savvy, open a spread sheet. In one column write down all the money coming into your household, in the other, all the expenses going out. This includes any and all monthly recurring expenses like the water bill, electricity, groceries, phone, insurance, rent, babysitter or daycare fees, online subscriptions, Netflix, etc. Tally it all up. Your Expense column should not exceed your income column. In fact, your income column should have at least 1/3 remaining. If you’re cutting it close, it’s time to cut some fat from your budget. Spend a month tracking every single purchase, from a pack of gum to your weekly coffee habit, groceries, gas. Track everything so that you know where your money is going.
- Wants vs Needs
It’s fine to feed your wants, as long as your needs are taken care of first. You may want Netflix, Hulu, HBO and Disney + and high-speed internet, but if you can’t afford groceries for the whole month, you’re going to have to cut back on that cable internet package. If you need that cable internet package for work, then it becomes a need, but you’ll have to cut back on some of your subscriptions, or that gym membership you haven’t used in months to make it work.
- Identify Money Pits
If you do have that gym membership but haven’t broken a sweat in more than 2 months, it’s time to quit. Look at what other monthly expenses you’ve got coming out of your bank account, especially reoccurring ones that you may not even realize are still charging you. It may feel like a hassle to unsubscribe or spend half an hour on the phone cancelling something, but it’ll save you a ton of money in the long run. By eliminating needless money pits, you can potentially save thousands a year.
- 20% Savings
Set aside 20% of each paycheck for savings. If you’ve got direct deposit, automatically send that 20% to your savings account and think of it like paying yourself. That money doesn’t exist to you once it’s in that account. Your budget is now what’s left over. Work with it, and in a few months check your savings account to see how much it’s grown! This is your nest egg. You can set up another savings account to be your emergency fund and send 10% of your earnings to that, if you’re feeling extra ambitious about getting ahold of your finances.
- Small Treats
Set aside a few bucks from each paycheck (think small!) and set a reward for yourself. At the end of the pay period or the end of the month, get yourself that manicure or new bag! Don’t overdo it, don’t buy if it’s going to mess up the budget. Be mindful of your overall budget and financial health. Small rewards are great motivation when overhauling your finances.
Come back soon to learn new tips and tricks to help yourself find financial balance.