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CREATING A BUDGET
How can I pay for my bills and have fun without running out of money? The answer is to make a budget.
A budget is a plan for every shilling you have. It’s not magic, but it represents more financial freedom and a life with much less stress. Here’s how to set up and then manage your budget.
STEP 1: CALCULATE YOUR NET INCOME
The foundation of an effective budget is your net income. That’s your take-home pay—total wages or salary minus deductions for taxes and employer-provided programs such as retirement plans and health insurance. Focusing on your total salary instead of net income could lead to overspending because you’ll think you have more available money than you do.
STEP 2: TRACK YOUR SPENDING
Once you know how much money you have coming in, the next step is to figure out where it’s going. Tracking and categorizing your expenses can help you determine what you are spending the most money on and where it might be easiest to save.
Begin by listing your fixed expenses. These are regular monthly bills such as rent or mortgage, utilities and car payments. Next list your variable expenses—those that may change from month to month, such as groceries, gas and entertainment. This is an area where you might find opportunities to cut back.
STEP 3: SET REALISTIC GOALS
Before you start sifting through the information you’ve tracked, make a list of your short- and long-term financial goals. Short-term goals should take around one to three years to achieve and might include things like setting up an emergency fund. Long-term goals, such as saving for retirement or your child’s education, may take decades to reach. Remember, your goals don’t have to be set in stone, but identifying them can help motivate you to stick to your budget.
STEP 4: MAKE A PLAN
This is where everything comes together: What you’re actually spending vs. what you want to spend. Use the variable and fixed expenses you compiled to get a sense of what you’ll spend in the coming months. Then compare that to your net income and priorities. Consider setting specific—and realistic—spending limits for each category of expenses.
You might choose to break down your expenses even further, between things you need to have and things you want to have. For instance, if you drive to work every day, gasoline counts as a need. A weekly entertainment budget may count as a want. This difference becomes important when you’re looking for ways to redirect money to your financial goals.
STEP 5: ADJUST YOUR SPENDING TO STAY ON BUDGET
Now that you’ve documented your income and spending, you can make any necessary adjustments so that you don’t overspend and have money to put toward your goals. Look toward your “wants” as the first area for cuts.
STEP 6: REVIEW YOUR BUDGET REGULARLY
Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track.
HOW TO CREATE A BUDGET IN 6 STEPS
ARTICLES
Personal Development
CREATING A BUDGET
How can I pay for my bills and have fun without running out of money? The answer is to make a budget.
A budget is a plan for every shilling you have. It’s not magic, but it represents more financial freedom and a life with much less stress. Here’s how to set up and then manage your budget.
STEP 1: CALCULATE YOUR NET INCOME
The foundation of an effective budget is your net income. That’s your take-home pay—total wages or salary minus deductions for taxes and employer-provided programs such as retirement plans and health insurance. Focusing on your total salary instead of net income could lead to overspending because you’ll think you have more available money than you do.
STEP 2: TRACK YOUR SPENDING
Once you know how much money you have coming in, the next step is to figure out where it’s going. Tracking and categorizing your expenses can help you determine what you are spending the most money on and where it might be easiest to save.
Begin by listing your fixed expenses. These are regular monthly bills such as rent or mortgage, utilities and car payments. Next list your variable expenses—those that may change from month to month, such as groceries, gas and entertainment. This is an area where you might find opportunities to cut back.
STEP 3: SET REALISTIC GOALS
Before you start sifting through the information you’ve tracked, make a list of your short- and long-term financial goals. Short-term goals should take around one to three years to achieve and might include things like setting up an emergency fund. Long-term goals, such as saving for retirement or your child’s education, may take decades to reach. Remember, your goals don’t have to be set in stone, but identifying them can help motivate you to stick to your budget.
STEP 4: MAKE A PLAN
This is where everything comes together: What you’re actually spending vs. what you want to spend. Use the variable and fixed expenses you compiled to get a sense of what you’ll spend in the coming months. Then compare that to your net income and priorities. Consider setting specific—and realistic—spending limits for each category of expenses.
You might choose to break down your expenses even further, between things you need to have and things you want to have. For instance, if you drive to work every day, gasoline counts as a need. A weekly entertainment budget may count as a want. This difference becomes important when you’re looking for ways to redirect money to your financial goals.
STEP 5: ADJUST YOUR SPENDING TO STAY ON BUDGET
Now that you’ve documented your income and spending, you can make any necessary adjustments so that you don’t overspend and have money to put toward your goals. Look toward your “wants” as the first area for cuts.
STEP 6: REVIEW YOUR BUDGET REGULARLY
Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track.