A financial budget is an estimation of income and expenses. It’s an essential tool for individuals and businesses at every income level. Bankruptcy lawyers in Harrisburg PA would agree that budgeting is important to stay financially sound.
Start by listing your fixed expenses, such as rent or a mortgage, utilities and car payments. Next, list your variable expenses, which may include groceries, dining out and entertainment.
- Track Your Expenses
The first step is to compile a list of your fixed and variable expenses. These may include things like mortgage or rent, utilities and auto payments. It’s also important to consider recurring costs such as groceries, dry cleaning and subscriptions like music or gym services. You can use an app to track spending or review your past bank statements. Don’t forget about the “little” expenses that add up, such as a daily latte or lunch out.
Once you have a clear picture of your expenses, it’s time to make some changes. Ideally, you’ll use cash for categories that tend to be more expensive, such as groceries and entertainment. This forces you to think before you spend and can prevent you from wasting money (such as on that unused gym membership) that could be used toward other financial goals. Be sure to check in with your budget regularly and make shifts based on life events or income fluctuations.
- Set Savings Goals
Once you’ve determined how much you spend on necessities and nonessentials, determining your savings goals can help you stay on budget. Whether you use pen and paper, a spreadsheet or a handy budgeting app, identifying what you want to save money for can help keep you motivated.
To make it easier, divide your expenditures into fixed and variable costs. Fixed expenses are those that typically can’t be easily adjusted, such as rent and utility bills. Variable expenses include things like groceries, entertainment and subscription services. Identify any areas where you can cut back to free up money for savings or paying down debt.
To help you stick to your savings goals, consider setting up an automatic transfer from your paycheck into a dedicated savings account as soon as it hits your bank. This will help prevent the temptation to blow the money on a new t-shirt or that fancy dinner date. You can also try using the envelope budgeting system, in which you pay for everything with physical cash and once the money is gone, it’s gone.
- Create a Spending Plan
Creating a spending plan allows you to see how much money is coming in, what expenses are going out and what is being saved. It can help you cut back on unnecessary expenditures, such as buying lunch at work.
A good starting point is to print out three months worth of bank statements and comb through them to identify all your expenses, including both fixed and variable costs. For example, fixed expenses might include your rent or mortgage, utilities, transportation, debt repayment and insurance. Variable expenses might include groceries, clothing, gym memberships and dining out.
Once you have your list of expenses, assign them to a budget category. For example, you might decide to allocate 50 percent of your income to essential expenses and 30 percent to things you want and 20 percent to savings. You might also choose to use a budgeting app that examines your accounts and moves money for you, such as Digit or Chime.
- Create a Retirement Plan
Whether you’re saving for emergencies, working toward a debt payoff goal or planning for retirement, creating a budget can help you figure out what it will take to make the goals work. Start with your after-tax income, which typically includes your paycheck and any automatic deductions like 401(k) contributions and health or life insurance payments.
Consider how much you need to cover your expenses, including utilities, food, transportation and entertainment. If those expenses add up to more than your after tax income, you’ll need to cut back or save more.
There are plenty of budgeting tools that can make the process easier and more effective. Whether you choose the envelope method or the 50/30/20 plan (which allocates 50% of your income to essential spending, 30% to discretionary spending and 20% to financial priorities like savings and debt repayment), finding a budgeting strategy that works for you can improve your chances of success.