Budgeting does not have to be hard. You need only to write down your income and subtract your expenses. Your expenses should include an emergency fund and all your everyday needs. A budget is the blueprint for your financial goals. All financial goals should have a plan to pay expenses, save, invest, and establish a good credit score. After reading Budgeting For Dummies: How to Budget Your Money you will learn step-by-step details on creating your budget.
A financially successful person has an orderly budget with their goals laid out. Budgets are designed to help you live within your means and avoid debt. A budget is worth living by because it will provide financial security and independence even during economic ups and downs.
There are many budgeting tools to help move you on the right path to helping you make ends meet. You can use paper and pen, spreadsheets, templates, or budgeting apps. However, true financial literacy is the key to solid financial footing. It will include understanding common budgeting challenges, such as living debt-free, controlling your daily spending, managing variable expenses, etc. I will provide some details about these challenges and additional information for Budgeting For Dummies: How to Budget Your Money so you can invest in your retirement plans.
A Sample Budget
As stated above a budget is a list of your income and expenses. You can do a yearly, monthly, bi-weekly, or weekly budget. Do whatever works for you and your unique situation. Here is a sample monthly budget for a salary of $40,000. The net pay is about $37,200 to 37,000. Let’s use $37,000 and make up some expenses to create this generic budget. You can use this to help you create your budget with paper and pen. Just substitute the income and expenses with your own.
Sample Budget For A Single Person
Estimated Monthly Salary and Expenses
Average Net Monthly Salary – $3080
Rent -$2,000
Cost of Utilities – $100
Cost of Food – $150
Car Note – $400
Auto Insurance – $130
Credit Card Payment – $50
Entertainment – $150
Savings – $100
Total Expense – $3080
Income – Total Expenses = $0
This represents a zero-sum budget. In this example, all money is allocated to a specific expense. This should be your current financial goal if you are starting a budget. The next step is to open up a checking and savings account. I recommend opening up a checking account and at least two savings accounts. Deposit all of your living expenses into your checking account to be used to pay all your bills. Set up a direct deposit for your savings account. The savings accounts will be used to start your Emergency fund and the others can be used as a Sinking Fund account. Read Checking and Savings Accounts for additional information on how to use them effectively.
Budgeting Tools
There are various budgeting methods and tools available online. Here are a few:
PDFs for Paper and Pen
Make a Budget Worksheet from FTC / Consumer.gov. It is a pdf.
BF Budgeting Spreadsheet. If you prefer a pdf format.
Spreadsheet Format
BF Budgeting Spreadsheet from BudgetingFaithfully.com. It is a Google Sheet. You will need to download Google Sheets to use this Spreadsheet.
Apps
Income
It is easy to create a budget when you have a set income every week, or bi-week. You know what can be counted on to cover all your expenses. However, when you have irregular Income and gig income it is best to start with your base income. Any additional income can be used to offset any variances in your expenses or added to savings. Income can be a challenge for your budget if your expenses exceed your income. Hence, a budget will help you see what expenses to eliminate to reach a zero-sum budget. You are in control of how and why you spend money. Therefore, you should let your budget guide your spending habits.
Expenses
Most expenses are the same amount, like rent or the car note. However, some are variable. This means that they change from month to month. Most variable expenses are based on usage, such as water, electric, or gas bills. I typically, look at the prior year as the model for the monthly budget. Historically, I use gas more in the water and electricity more in the summer. Over time, you will see the pattern of your variable expenses. Variable expenses are another challenge when budgeting. Let’s talk more about Saving.
Emergency Fund/Sinking Funds
Emergency funds are for those unexpected expenses that seem to happen when you least expect them. It could be medical costs, a car expense, or an unexpected travel expense to visit a sick relative. Hence, an emergency fund will help you stay out of debt. You will not be forced to put any of these expenses on a credit card to pay over time.
This adds additional costs to your current budget which you want to avoid. The emergency funds will also prevent you from borrowing money from family and friends. You want to avoid owing money to anyone or any company in the form of loans or credit card debt. Read Emergency Fund Savings for more information on this type of account.
A sinking fund is a savings account earmarked for major purchases such as vacations, gifts, a car, etc. In a world that says buy now with easy credit terms does not encourage people to slow down and save for the things they want or need. Whenever possible avoiding debt will prevent you from spending current and future income that now belongs to the lender. This money could be used to save for retirement or other financial goals.
Credit Card Debt
Try to avoid the credit card trap. Being able to afford the minimum payment is not the same as being able to afford the purchase of a major or minor item. It takes discipline to live within your means. Try to be patient and save for the things that you want and/or need. Getting out of credit card debt by paying the minimum payment is difficult.
For instance, if you owe $1,000 with a 21% interest rate and pay the minimum payment of $20. It will take 120 months to pay this credit card balance off. Use the Bankrate’s Minimum Payment Calculator to estimate how long it will take to pay off your credit card debt. You can also use it to determine how much you have to pay if you want to pay the balance off in less time.
Recap of Budgeting For Dummies: How to Budget Your Money
A budget is as simple as adding up your income and subtracting expenses. Budgeting requires opening up a checking and an emergency fund savings account at a bank. The checking for paying bills and the emergency fund for unexpected costs such as car repairs, medical expenses, or unplanned trips. In addition, budgeting is setting aside funds in a sinking fund savings account for major purchases, such as a nice vacation, major appliances, or a new car.
Life Stages play a major factor in how you budget your money. If you are single with no additional responsibilities but yourself, you must ensure you do not overspend and end up in debt. Your main focus should be paying off any debt and saving and investing. Your focus should be banking as much of your money for your retirement. If you are married with no children, you should save for retirement and purchasing a home. If you are married or single with kids, you should still save for retirement and your child’s education. Seek a financial advisor for true advice on managing your personal finances.
What you will need to get started on making a budget
- A method to budget i.e. paper and pen, spreadsheet, or app
- Open a Checking account to pay bills
- Open a Savings account to save for emergencies
- A Savings account for major purchases
- investment accounts. i.e. 401k or IRA
- Seek a financial advisor to map out your financial goals.
This content is for information purposes only. It does not constitute financial advice. If you need personal advice, please consult a financial advisor. I do not endorse any of the companies mentioned. Please research and do your due diligence. I do not get paid if you click any of the links.