When you hear the word ‘budget,’ what do you think about? For many people, negative associations pop up. Perhaps you’ve tried budgeting in the past, but didn’t stick with it. Or now you’re living with a partner or spouse and aren’t sure how to merge your finances and budget together. Rest assured that budgeting is for everyone. In this article, we’ll walk you through the steps required to create a budget that fits your lifestyle and personality.
Why do I need a budget?
Everyone, regardless of how much or how little money they make, how much debt they have or not, and what kind of lifestyle they’re aiming for, can benefit from budgeting. Just as therapy can help you have a healthier relationship with yourself and the people in your life, a regular budgeting practice can improve your relationship with money. Just being willing to look at your finances with both eyes open is the first step.
Do you know how much money (down to the dollar and cents) you spend in one month or one pay period? If not, you’re in good company. Many people wonder where their money goes each month instead of knowing exactly what was spent on which expenses. The prevalence of using debit and credit cards only makes it easier to lose track.
So, in the first step to creating a budget for your lifestyle, you’re going to review bank and credit card statements to see what you actually spend in a month. Don’t get hung up on whether or not last month was an “average” month. As you’ll see in the process of budgeting, there are always unanticipated or impulse spending that you forget to budget for. That’s why you’ll start giving yourself a cushion to make mistakes. In the meantime, getting clear on what you spend will empower you to make decisions about where you want your money to go and help you reach your savings and other goals faster.
How much money does it take to support my lifestyle?
You may have a sense of your fixed monthly expenses already such as mortgage or rent, utility bills, phone bill, car payment, etc. But going through last month’s bank and credit card statements will help you determine all the categories you spend money on, including discretionary expenses such as dining out, entertainment, and so on.
Once you have all your spending categories and the amount spent in each category over the previous month, you’ll know how much money is required to support your current lifestyle. However, our spending habits don’t always align with our true priorities, especially when we’re not budgeting. So, take some time to think through your financial goals, as well as the less frequent future expenses you should be saving for, such as holiday spending or a new laptop when your current one breaks.
Next, make a simple math calculation:
Monthly net (take-home) income minus necessary expenses (bills, groceries, gas, etc.) equals ____.
Hopefully, that number will be positive. If it’s negative, you have a basic problem that can only be fixed by reducing your expenses or increasing your income. Otherwise, the next step is to divide that leftover amount of money between discretionary spending, near-term savings goals, and long-term savings for retirement and other priorities.
How do I meet my financial goals?
The hardest part about meeting your financial goals is to stay on track with your spending. Whether you’re saving for next year’s vacation or holiday season, a child’s college education, retirement, buying your first house, or other priorities, you have to keep setting money aside to get there. That’s why overspending can derail your goals. Of course, we all have bad days, make mistakes, and face unexpected expenses such as a sudden car repair. No one’s budget will go perfectly all the time, so don’t let setbacks keep you from trying again.
One good way to reduce or eliminate overspending is to identify your personal triggers that result in impulsive or simply unplanned purchases. For example, stress, hunger, fatigue, and negative emotions can all spur us to buy something as a treat to make us feel better. Or we simply have less impulse control in the moment because of our physical state. Being mindful of what’s going on in your body and mind can help you avoid unplanned spending.
What are some effective budgeting strategies?
Your budget can be as simple as making lists with pen and paper or you can use one of the many apps and software programs available. As far as approaches to budgeting go, the main ones are:
- 50/30/20 Rule: Half of your take-home pay goes to necessities, 30% to discretionary spending, and 20% to savings and paying off debt.
- Cash Envelopes: With this system, you take out cash for each spending category where cash is possible (such as groceries). The idea is that using cash helps you keep track, physically, of how much is left in each category.
- Zero-based budget: Take the money you have right now, in your checking account, and assign every dollar to a category, starting with necessities.
What do I do with my excess savings?
If you are already setting aside enough money to cover your financial goals and spending habits, consider saving some of your money for emergencies. The COVID-19 pandemic taught us all about life’s inherent uncertainty. Building an emergency fund will help you weather a temporary job loss or drop in income, medical bills, or other disruption to your everyday life. Most financial advisers recommend having 3-6 months of living expenses on hand. Depending on the type of job you have and your family situation, you may want to accrue more than that. When it comes to stashing your emergency fund, a regular savings account is best. You want to be able to access it when needed and you don’t want to risk losses in the stock market.
Open a new savings account with SENB Bank!
Open a savings account online to get started building your emergency fund or working toward other savings goals you identified in your budgeting process. SENB Bank has proudly served the Quad Cities and neighboring communities since 1961. We now have six banking centers serving Illinois, Iowa and Wisconsin. Contact us today!