Making a budget is very important for everybody to do. The mismanagement of finances has been linked to increased stress levels, bankruptcy, and divorce, among other negative things, and budgets are powerful tools to help with money management. If you don’t have a budget, it’s a good idea to start one, and if you do have a budget, these fundamentals are worth reading again. Here are five steps that will help you make an effective budget.
Step 1: Determine Your Net Income
The first step to creating an effective budget is determining the amount of money you have available to spend. Keep track of all the money you have coming in, from official paychecks to any income you get from odd jobs or other sources. Having an updated and accurate account of the money you have is important because your whole budget will be built around that.
Step 2: Track Your Spending
Once you have an accurate count of your income, you need to start tracking where your money is currently going. Knowing what you spend money on will help you track which things you spend the most money on and which areas will be the easiest to cut back your spending on. When you track your spending, start with your fixed expenses (regular monthly bills like utilities, insurance, etc.), then move on to your variable expenses.
Step 3: Set Reasonable Goals
This is when you’ll set short- and long-term goals for how you want to spend your money. Retirement and your children’s college funds are examples of long-term goals and reducing credit card debt and saving for a vacation are examples of short-term goals. Determining your goals will help you make your budget and keep you motivated to follow your budget even when it’s difficult.
Step 4: Make Your Budget
In this step, you will divide your net income into categories and will set a limit for how much money you can spend on each category. Your budget will be largely influenced by your current spending habits and your financial goals, but by the end of it, you should have spending limits for categories such as eating out, recreation, online shopping, and other things that will help you reduce your daily spending.
Step 5: Change Your Habits
Adjusting to your budget might be hard. It will require you to change your habits and be more thoughtful of how you spend your money. If you go over your budget, don’t give up! Make a plan to spend less in that category or review your budget and make some changes to it. So long as you stick with it, you’ll get the hang of your budget in no time and you’ll start saving money.