Are you finally ready to commit to a budget?
A budget is the best way to strive toward financial freedom. Without a budget, you’re far more likely to spend money aimlessly and damage your bank account and credit score.
Let’s face it, creating a budget is relatively simple. Yet, only 41 percent of Americans report having a current budget in place.
Why is this number so drastically low, you ask? While creating a budget is simple, the real challenge lies in creating a budget that is actually realistic. After a short timespan of practicing a budget, the majority of people will slowly but surely abandon their budget.
If you’re looking for tips on how to create a budget, you’ve come to the right place. We’re talking all things budgeting 101 and providing the best tips and tricks for how to create a realistic budget.
1. Identify Your Income
First things first, it’s essential to begin by identifying your income.
While a salary is typically calculated on an annual basis, it’s best to determine your income on a monthly basis. This makes it easier to track and understand your income on a more micro scale.
To do this, calculate all sources of income on a monthly basis. For accuracy, it’s best to calculate your after-tax income.
2. Analyze Your Expenses and Spending
Now that you have identified your income on a monthly basis, it’s time to analyze your expenses as well as your spending habits.
To begin, document each and every expense that must be paid on a monthly basis. These are expenses such as rent, debt payments, insurance payments, phone bills, utility bills, and donations.
Next, it’s time to document your monthly spending habits. This will combine both necessities such as food and transit as well as extras such as entertainment and shopping.
3. Determine Wants versus Needs
This next step always proves to be a challenge in setting a budget. However, it’s arguably the most significant step in creating a budget that is realistic.
After analyzing your spending, this is where you determine your wants versus needs. This is where it’s most important to be realistic and honest with yourself and your spending habits.
Consider that if you eliminate too many of your wants, you’re more likely to stray from your budget. Instead, focus on your wants that have little effect on your overall happiness and daily life.
For example, while you may be in the habit of purchasing lunch every day, it’s important to determine if that daily spending is increasing your happiness. This is as opposed to taking the time to prepare lunch at home.
4. Create Realistic Financial Goals
Now that you have had a long, hard look at your finances, it’s time to set some realistic financial goals.
Start by asking yourself where you want your finances to be within a year. Do you want to have a solid savings account and pay off your student debt? Or, maybe you want to start trading stocks or open an investment account?
Establishing these goals ahead of time is the best way to encourage you to avoid unnecessary spending. When you’re faced with a decision to spend unnecessary money or contribute that money to your savings, you’re more likely to make the decision to save.
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5. Use Budgeting Tools
Today, we live in a world where technology has the ability to help and provide guidance to us on a daily basis.
And so, when it comes to budgeting, it’s safe to say that there’s an app for that.
In the online world, there are a number of apps that are designed to help create a budget, track your spending and encourage saving. These apps are simple to use, effective and often free.
6. Consider Short-Term Goals
When it comes to saving, many people focus on their long-term goals.
For example, some may focus on saving for retirement or a future education fund. While these are healthy long-term goals, many young people will benefit from focusing on more short-term goals.
These short-term goals may be anything from saving a certain amount of money on a monthly basis to saving for a downpayment. While long-term saving goals are incredibly important, short-term goals help to make the concept of saving feel more beneficial.
7. Automate Your Savings
Let’s be honest, putting money into our savings each month isn’t always easy.
After paying rent, utility bills and tracking the month’s expenses, contributing money into a savings account often falls to the back burner. To help ensure that this doesn’t happen, it’s best to automate these payments on a monthly basis.
After all, having an established savings account is the best way to prepare for sudden and unexpected expenses. Let’s consider that two-thirds of Americans admit that they would struggle to come up with $1000 in an emergency. To ensure that you fall outside of these numbers, it’s essential to have a savings account.
First, determine a monthly amount that is realistic to set aside for savings. Next, set your bank account to automatically withdraw this money each month.
It may be helpful to have these funds withdrawn from your account in the middle of the month. This helps to break up your expenses from other payments such as rent, phone bills, and utility bills.
8. Get a Friend on Board
As with many things in life, committing to a serious task is easier when two parties are involved.
Remember, creating a realistic budget doesn’t have to be an individual task. In fact, creating and stick to a budget may be more realistic if you commit to this task with a friend or family member.
When two parties have committed to a common goal, it creates a sense of accountability amongst these parties. When tempted to spend above your budget, you’re less likely to do so when you know that a second party is holding you accountable.
Budgeting 101: How to Make a Budget and Stick to it
If one of your goals for 2019 was to inch your way closer to financial freedom, you’re going to want to start with creating a budget.
Unfortunately, not just any budget will do. The trick is to think long and hard to create a budget that is realistic. This type of budget will examine your income, analyze your spending habits and steer clear of unnecessary spending.
The result is spending less money on a day-to-day basis and creating a long-term savings plan. If you’re serious about your budget, you’re going to want to put these tips to use for your budgeting 101 plan.
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