Creating a budget is relatively straightforward. You don’t have to do without to live well on less if you are careful. Budgeting can even make you feel slightly richer after you start sticking to it, because you are using the money you have more wisely. Follow this method to set your budget and then work toward perfecting your plan.
* Track Your Spending for a Month – When you first start, don’t change a thing. Instead, start tracking your spending. And if you spent less than usual this month, use a six-month average to get started with your realistic budget.
* Add Up All Your Current Expenses – Now add up all your expenses, including your ordinary household expenses like mortgage, and your credit card bills too. This will tell you what you spend each month.
* Add Up Your Current After-Tax Income – Now you want to add up how much you make each month on average. If you make more some months than others, include that. For example, if you get paid every two weeks, there are two months when you get an extra pay date.
* Set Your Bill Pay-Down Goals – Once you see your consumer debt and your regular living expenses all in one place, you want to set some pay-down goals so that you can get out from under credit debt. It’s more important to pay that credit down than it is to save for an emergency due to the savings on interest.
* Set Your Savings Goals – Most people need short-term, long-term, and retirement savings. What you want to save now depends on where you are. If you are already in retirement, your savings are more than likely for short-term and semi-long-term needs such as paying for a new roof, buying a car, or paying for a vacation or (hopefully not) an operation.
* Adjust Your Numbers – Once you see what you really spent, if you can still save money living exactly as you have, then keep it the same. If you are overspending and relying on credit, change the numbers in order to avoid that situation.
* Keep Records and Track Your Progress – Once you have it all set up, simply follow what you set. Every week or whatever period works for you, double-check that you are sticking to your budget so that you don’t go over.
* Be Realistic – When you set your budget, it’s imperative that you are super-realistic about it. If you hate cooking, don’t set up a plan that requires you to cook daily. You’re not going to stick to it. Craft a plan that fits your personality.
* Work toward the 50/20/30 Budget Rule – If you ever go to debt counseling, you’ll learn about the 50/20/30 budget rule, which they should teach everyone in high school. The way this budget works is that you set aside 50 percent of your after-tax income to pay for all your needs such as groceries, housing, utilities, health insurance, car payment, water, and doctor bills. 20 percent goes to savings, while 30 percent goes to wants such as shopping, dining out, and hobbies. If you have credit card debt, you should take it from your wants (and if you have to your savings) due to the interest.
Setting a budget simply requires that you write down what you will spend on everything you want and need to purchase, from housing to health care to entertainment. If you have a shortfall, you need to either cut the budget items down or make more money.