Living on a Budget
Posted: July 25, 2022
Modified: July 25, 2022
A budget is a plan that allows you to maximize your cash by identifying your needs and your wants. It's a great opportunity to examine your current spending to determine what adjustments can be made. A budget is a spending plan that can help you save money.
Understanding and evaluating your expenses allows you to find better ways to set limits and curb any excess spending. Below is a six-step guide that may help you take control of your finances.
After creating your categories, you may wish to apply the 50-30-20 rule to each of these categories to determine where each one measures. The 50-30-20 rule dictates that 50% of your income should go to needs, 30% to wants, and 20% to savings. This will be the main metric you will use to determine the strength of your budget.
After calculating your expenses, determine how close you fit the 50-30-20 model as mentioned in Step 3 by calculating how much of your income falls under needs (50%), wants (30%), and savings (20%). When you have completed your expense and income calculations, compare the values to determine if any money is left over. If your income is higher than your expenses, but you do not meet the 50-30-20 rule, there may still be room for improvement. Conversely, if your expenses are higher than your income, changes will need to be made.
If, after these adjustments, your expenses are still higher than your income, you may need to find ways to reduce your fixed expenses. The methods for accomplishing this may vary based on your situation. If these fixed expenses cannot be reduced, one way to balance your budget may be in finding additional income where possible. With all adjustments, the goal is for both income and expenses to be equal, meaning that all money is accounted for.
Modified: July 25, 2022
What is a Budget?
A budget is a plan that allows you to maximize your cash by identifying your needs and your wants. It's a great opportunity to examine your current spending to determine what adjustments can be made. A budget is a spending plan that can help you save money.Understanding and evaluating your expenses allows you to find better ways to set limits and curb any excess spending. Below is a six-step guide that may help you take control of your finances.
Step 1: Dig up Your Documents
This is the preparation phase of budgeting and consists of gathering anything that can be used to evaluate your finances. This may include, but is not limited to:- Credit Card Statements
- Tax Documents including W-2
- Bank Statements
- Paystubs
- Rent/Mortgage Payments
- Auto Loan Payments
- Receipts and Bills (Recommended 3 Months worth)
Step 2: Determine your Income
What can you expect to take home? This can vary depending on your employment status. For example, if you are employed and earn a regular paycheck, this may be all you record, but if you have additional income sources such as child support or social security, these need to be factored in as well.Step 3: List your Expenses
There are numerous ways to list your generalized expenses, but the best way is to set categories and determine a value for each. You will likely realize that some of these categories are variable, whereas others are fixed. Your list may include some of the following:- Rent or Mortgage Payments
- Groceries
- Utilities
- Car Payments
- Entertainment
- Transport/Gas
- Student Loans
- Insurance
- Eating-out
- Savings
After creating your categories, you may wish to apply the 50-30-20 rule to each of these categories to determine where each one measures. The 50-30-20 rule dictates that 50% of your income should go to needs, 30% to wants, and 20% to savings. This will be the main metric you will use to determine the strength of your budget.
Step 4: Organize your Expenses
The most important part of budgeting is to factor in where your money is spent. After setting these categories, use your documents from Step 1 to organize your expenses where they best fit. This allows you to determine which expenses are fixed, and which are variable. The variable portion of your expenses is where the budgeting will take place.Step 5: Total your Income and Expenses
After separating out your expenses among your categories, calculate a value for each. In some cases, your expenses may be a monthly value, whereas others occur weekly. The key to success with this is to find a common metric that will allow you to break down your expenses and income in a way that allows you to better understand them. Finding this common metric may require averaging out weekly values over the course of a month, or dividng monthly ones, depending on your circumstances.After calculating your expenses, determine how close you fit the 50-30-20 model as mentioned in Step 3 by calculating how much of your income falls under needs (50%), wants (30%), and savings (20%). When you have completed your expense and income calculations, compare the values to determine if any money is left over. If your income is higher than your expenses, but you do not meet the 50-30-20 rule, there may still be room for improvement. Conversely, if your expenses are higher than your income, changes will need to be made.
Step 6: Adjust Your Expenses
If you find that your expenses are higher than your income, find categories in the variable expenses that could be reduced. You do not need to necessarily cut out a category in order to live within your budget, but you may need to adjust how the money is spent until you find a way to balance your expenses with your income.If, after these adjustments, your expenses are still higher than your income, you may need to find ways to reduce your fixed expenses. The methods for accomplishing this may vary based on your situation. If these fixed expenses cannot be reduced, one way to balance your budget may be in finding additional income where possible. With all adjustments, the goal is for both income and expenses to be equal, meaning that all money is accounted for.