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While treating yourself every now and then is perfectly fine, you'll thank yourself for creating a budget that allows you to save every month and gradually build a nest egg. Having a plan helps you keep track of your expenses and prevents you from overspending.
With inflation rates continually increasing month-on-month, There's no better time than the present to plan ahead and ensure your head's above water in the long run. Here are some tips to help you create a budget.
5 Steps to Get You Started
1. Calculate Your Monthly Income
The first step in creating a monthly budget is to determine how much you earn. While this is a relatively simple process, there's more to it than a quick glance at your bank statement. You should limit yourself to consistent sources of income to come up with a reliable figure. You should also consider your net income, which is the money you have left over after paying taxes and taking out payroll deductions.
2. Track Your Spending
One of the best ways to get a better idea of how much money you should allocate each month is to track your spending. Various apps can help you log your expenses, but if you're old school like me, you can also manually add up expenses and record your purchases using receipts.
Understanding how much money you should allocate each month can help you plan for the next step in the process. It will also allow you to identify areas where you may be spending more than you should. Lastly, include annual expenses, such as car insurance, taxation, and vacation expenses.
3. Understand Your Financial Priorities
It's time to take a look at your spending history to see how it aligns with your priorities. Everyone has expenses they can't avoid, such as food, rent, and bills. However, if you're not trying to keep track of your spending, spending can be easy to spend more than you should.
For instance, you may find yourself spending a lot of money on takeout, as well as subscriptions that you rarely use. Instead of only limiting yourself to certain expenses, building a budget allows you to allocate your money in the way that works best for you.
After you know how much money you should allocate each month, it's time to start implementing changes in your spending habits.
4. Design your budget
Now that you have all the necessary information, you can start drafting a budget that will help you navigate your expenses without feeling overbearing. If you're planning on overhauling your spending habits, start by building a budget from the ground up. A good starting point can be to put aside money for emergencies, such as a new car or a down payment on a home.
One of the most common strategies for building a budget is the 50/30/20 rule. This suggests that you should allocate half of your income to needs, 30 percent to wants, and 20 percent to savings. The exact amount that you should allocate for these categories can vary depending on your spending habits.
Although there are no strict rules when it comes to managing your finances, try to spend less than you make each month. This means you should only allocate a certain amount of money each month to save. Even if you can't put away 20 percent, setting aside as much as possible is a great financial habit to start implementing.
5. Refine Your Budget
Your budget is never set in stone, and you must regularly monitor and follow it to ensure that you're staying on track and if you see any discrepancies.
As your life circumstances and priorities change, so should your budget. For instance, if you have a new loan that you need to settle or a raise that allows you to spend more freely, your budget should reflect these shifts to paint an accurate image of how much you can spend.
The Bottom Line
Keeping track of your spending has become more important as the prices of goods and services continue to rise. Having a budget that outlines how much you can spend can help you keep up with your expenses and improve your financial habits.
By following the instructions I've outlined above, you can plan for the future without having it feel overbearing. It's always a pretty sight to see your bank balance go up with each passing month, so stay consistent, spend smart, and work for early retirement for comfort and ease. Good luck!
About Francisco J. Faraco
FINRA Brokercheck Francisco Faraco is a CFA Charterholder who has also been a Teaching Assistant in Financial Mathematics at the University of Chicago for the Master of Science. His experience makes him ideally qualified to teach students to pass the CFA exam levels.
