We all know it’s important, but almost none of us do it: budgeting.
Creating a budget and sticking to it is one of the most difficult and yet more fundamental aspects of our financial lives. It’s how we manage our spending, pay off debt, accrue savings, and make wise investments. We’ve all tried making a budget at some point, but most people eventually fall off and give up on tracking their income and expenditures in favor of a more laissez faire attitude.
Here’s a 10 step guide to creating a budget for yourself, and then (here’s the hard part) actually sticking to it.
Step 1 Decide why you’re saving money
This step is usually overlooked, but it should be your first one. We all know that saving money is important, but why?
You’re not saving money so it can sit in a pile gathering dust forever. Eventually, your savings is meant to be spent. If you don’t have a clear idea of why you’re saving money or specific goals for your savings, you’re not going to have a strong motivation for sticking to your budget.
If, on the other hand, you have been eyeing a fabulous vacation for your family for years, or a car you’ve always wanting, that’s a clear, concrete goal to aim for while budgeting. Keep your eye on that prize, and you’ll stick to your budget.
Step 2 Calculate your average monthly earnings (after taxes!)
This one may seem obvious, but many people don’t know how much money they make each month. It’s especially hard to track if you have multiple streams of income or your income varies from month to month. You’ll want to add up all your monthly earnings, from regular employment as well as side jobs, investments, and other forms of income, and come up with an average per month figure.
Make sure to calculate this figure after taxes. If you don’t already know your after tax earnings, you can use a take home pay calculator to come up with an estimate.
Having this number right from the start and keeping it in mind will be the foundation for the rest of your budget.
Step 3 Decide on a ratio for needs, wants, and savings (hint: it doesn’t have to be 50/30/20)
If you read a lot about budgeting and personal finance, you’ve probably read some advice before about the 50/30/20 rule. Just to refresh your memory, prevailing wisdom is that you should spend 50% of your income on needs (such as housing and food), 30% of your income on wants (such as shopping and entertainment), and 20% of your income on savings (this includes investments).
This is a great general guideline, but it’s not a hard and fast rule. When people don’t stick to a budget, it’s usually because it was unrealistic to begin with. That’s why universal rules don’t always work. Pick a ratio that’s right for you, but afterward, make sure you stick to it.