Tired of living paycheck to paycheck? Having trouble saving for an emergency fund? It’s possible that you may have challenges with budgeting. Creating a budget is the first step to a healthy financial future. To be financially healthy, you need to be aware of how much money goes into your account each month and how much goes out.
Once you’ve taken stock of how much money you’re making, you need to evaluate your spending habits. In this guide, you’ll find out how to make the spending cuts you need to refocus your dollars on your financial goals.
Items to Include in a Budget
When creating a budget, the main items to take into consideration include debt and loans, periodic expenditures and miscellaneous activities that may come up.
Consider including the following in your budget:
- Debt – What are you doing to tackle it? Definitely don’t ignore credit card debt, as interest builds up over time and increases the amount you owe.
- Loans – Any loans, especially car loans, should be your priority. How about student loans? Ask your loan servicer if you can get on a payment plan that works with your budget.
- Monthly Expenses – Take stock of all your monthly necessities, such as rent or a mortgage, utilities, home repair and maintenance, cable, Internet, phone and insurance payments.
- Daily Expenses – Groceries should be next on your list. Think about couponing or using sales when possible. Other essentials like car maintenance should be included in here as well.
- Personal Care – Haircuts, waxing and getting your nails done fall into this category. This may be the first part of your budget you cut when trying to save on expenses.
- Health Care Costs – Insurance premiums, co-pays on medications and visits to the doctor all add up. Researching the best options for your budget can help reduce expenses significantly.
- “Fun” Budget – This includes drinks and food when you’re going out, concerts, birthday gifts and other expenditures that aren’t quite requirements.
Planning Out Your Budget
One popular way to create a budget is to use the 50/30/20 method. Basically, you want to spend 50 percent of your after-tax dollars on necessities, 30 percent on wants and at least 20 percent on savings and debt repayment.
For someone inexperienced with budgeting, it may seem like a daunting task to get your budget in line with this method. Although it’s not impossible, it will take some work.
Your first priority after getting your budget in order is to save for an emergency fund. The fund should cover anywhere between three to six months of expenses in the event that you lose your job or are too sick to work. This fund also serves as a buffer for pricey, unexpected expenses like car repairs.
Your next priority should be getting your employer to match on your 401(k). A 401(k) is a retirement account usually provided by the company you work for. Your 401(k) contribution is typically taken out of your paycheck automatically at an amount that you decide.
Getting an employer-matched 401(k) contribution means the company is adding money to your account as well. Make sure you add enough to maximize your employer contribution.
Related Article: Managing a 401(k) Plan
Priority number three is toxic debt. High-interest credit card debt, personal and payday loans, title loans and rent-to-own payments all qualify as toxic debt. All of them carry interest rates so high that you end up repaying two or three times what you borrowed.
Investigate options for debt relief, including bankruptcy or debt management plans. This is especially true if you can’t repay your unsecured debt within five years or the debt equals half or more of your gross income.
Once you’ve got the debt under control, save for retirement beyond your 401(k). While the 401(k) goes a long way to increasing your assets, it’s not enough.
Aim to save 15 percent of your gross income. If you’re young, consider funding a Roth individual retirement account (IRA) after you capture the company match. A Roth IRA is a type of investment account that you can hire a broker to handle or let an algorithm choose investments for you.
If you’ve still got money left over, put it into your emergency fund. Consider paying off debt faster with any remaining funds you have available.
Creating Your Budget
The easiest way to actually create your budget is to use a spreadsheet on your computer. Here’s a step-by-step guide for creating one in Excel:
- Open up Excel so that you have a blank spreadsheet.
- Put in the months over which you want your budget to run. Type each month in an individual cell along one row of the spreadsheet. Start from left to right on the second row of the spreadsheet.
- Put in a heading on the left hand side for income. Add any subheadings for the type of income you receive. Salary, pension and benefits should all be there.
- Skip two or three lines and put a header for expenditures, followed by the sub-headers for the type of expenditure. Add rent, utility bills, groceries and more.
- Once you have the headings ready, start to put in calculations so that Excel calculates the amounts you input later.
- Click on the cell where you want the total income to appear. You may want to label “TOTAL” next to that cell.
- Then, click “Autosum” in the menu ribbon.
- Click and drag on the cells that you want to include in this total, so that all the cells are highlighted. Click “Enter” on your keyboard.
- Once you have the formula in the first cell, copy that cell and paste it into all the other cells in that row that require the same formula. You should have one “TOTAL” cell below each month.
- At this point, you can repeat the “Autosum” steps for the expenditure section. Again, have one for every month.
- Now you can add in your expenditures and income into the cells above the “TOTAL” cells. Your “TOTAL” cell should update automatically as you enter each amount.
- Once all the information is input, subtract your expenditures from your income to get an idea of what you’re spending each month.
Related Article: Saving on Family Household Costs