It’s a new year this 2024, which means different things to different people. For the money-conscious ones, it entails being more economical with money and saving enough for a rainy day.
Of course, you should be able to pay for all your basic necessities like food, electricity, water, housing, health care, and insurance, and have enough left over for fun outings. However, some can inadvertently go over budget due to emergency circumstances, which is unfortunate but necessary.
This 2024, it’s time to turn over a new leaf and start to budget your money.
What is a Budget?
It is a plan for every dollar you earn from your job, what you have in your bank account, and your pocket. It represents financial freedom in your life without incurring stress. Here’s how you create and manage your budget:
How to Budget Your Money
You Need to Calculate Your Net Income
Net income (your take-home pay) is the foundation of an effective budget. It is your total earnings or salary minus deductions for employer-provided programs (like health insurance and retirement plans) and taxes. If you focus on your total earnings rather than net income could entail overspending because you might think you have more money than you have.
If you have an irregular income from working as a gig worker, contract worker, or freelancer, or are self-employed, you need to make sure to keep detailed and complete notes of your pay and contracts to help manage it.
You Need to Track Your Spending
Once you know for sure how much you make coming in, you need to figure out where it should go. Categorizing and tracking it can help you find out what you are spending more on and where it is easier to save.
You start by listing your fixed expenses, which are your regular bills (mortgage or rent, car payments, and utilities). Then, list down your variable expenses these are the kinds that change from month to month (gas, groceries, and entertainment). It is the part where you can cut back and save. Bank and credit card statements are great places to save since they categorize and itemize your expenditures monthly.
You can record your spending with anything at your disposal, like an app on your phone, a pen and paper, online templates, or budgeting spreadsheets.
You Need to Set Realistic Goals
Before you begin looking closely at the information you have tracked, list down your short and long-term financial goals.
Your short-term goals should take about one to three years to accomplish. They may include matters like paying your credit card debt and organizing an emergency fund.
Your long-term goals (your children’s education, saving for retirement, etc.) can take decades to achieve.
Identifying both can assist in motivating you to stick to your budget. This way, it will be easier to cut down on spending if you know what you’re saving for.
You Need to Make a Plan
This is the part where everything comes into place: what you want to spend and what you are spending. You need to utilize the variable and fixed expenses you collected to learn what you will spend in the coming months. Then compare them to your net income and your financial priorities. Think about setting specific and realistic spending limits for each expense category.
You can also further break it down by including things you want and things you need. For example, a monthly Netflix subscription can be regarded as a want. The differences will be crucial when you’re trying to find ways to redirect your funds to your financial goals.
After you have properly documented your earnings and spending, you can make any essential adjustments so you won’t overspend and have enough funds to put to your goals. Your “wants” category is the first part you can cut. For example, you can skip movie night and replace it by watching it at home instead.
You Need to Adjust Your Spending to Remain on Budget
After doing it, the next category you need to take a closer look at is how much you spend on monthly payments. Once done, you will find out that a “need” is difficult to part with.
If your calculations don’t add up, then the next category for adjusting is your fixed expenses. For example, you can save money by shopping around for a less expensive rate on homeowners or auto insurance. If you do this, you need to be careful and weigh your options since these kind of decisions come with a big trade-off.
Don’t forget that even small savings will add to lots of money, and you may be surprised at how much you’ve saved by making one tiny adjustment.
Try the 50/30/20 Rule
The 50/30/20 Rule came from a book written in 2005 called, “All Your Worth: The Ultimate Lifetime Money Plan,” by US Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi.
It is a straightforward method for monthly budgeting that informs you on exactly how much to go to your costs of living and savings. As a guideline, you need to divide your earnings into three categories: 50% goes to your needs, 30% to your wants, and 20% to paying off debts or savings.
However, you only need to use it as a guideline. The exact amount for each category will still depend on many factors like your cost of living, financial situation, inflation, etc.
Conclusion
You need to review your budget regularly, and once it is set up, it is essential to review it and your spending habits regularly to be sure you’re on the right track.
Make sure to follow these steps and get into the habit of checking it often.
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