Today let’s chat about budgeting. It’s not a favorite pastime for most people, but it can really be an eye-opener when it comes to your finances. A budget really is the cornerstone of a solid financial foundation. The basics of budgeting are simple: track the money you have coming in, track your expenses, and manage what you have leftover on a monthly basis.
Let’s start by defining the main components of a budget:
- Income – Sources of income can include wages, pensions, and any rental or side business income, as well as any significant interest or dividends you receive regularly. If you're a freelancer or run a business and you don't receive a regular paycheck, you can use your average monthly income for the past year for an income basis.
- Fixed expenses – Those expenses that stay the same from month-to-month, or each year, such as mortgage or rent, car payments, insurance, loan payments, and taxes. These stay relatively fixed, meaning you can’t easily change the amount that is due each month.
- Flexible expenses– These items can change from month to month, such as how much you spend on utilities, groceries, transportation, subscriptions, clothing, and entertainment.
- Disposable income– This is the money you have leftover after you subtract your income taxes from your income.
Before you start creating your budget, think about what your goals are. Do you want to pay down debt, save for college, create an emergency fund, or maybe save for vacation? Keep your goals in mind as you go through the process.
Now it’s time for you to get started and get logging! Identify your income and monthly expenses, both essential and nonessential. Be honest when calculating your nonessential spending! Acknowledging how much you actually spend is important in order to create a budget that will work for you. Start tracking your spending each day, using an app on your phone, or old school pen and paper. You might not realize that you’re overspending on something that can easily be cut back on. If you have pets, don’t forget to include expenses related to them too!
We recommend starting with a basic budget that breaks your spending into main categories, such as housing, food, education, etc. If you would like help getting started, we’d be happy to share some budgeting tools with you. You can request them HERE.
Remember, budgeting is an ongoing process. If you overspend your budget, restart again the next month and make adjustments to your plan if needed. Take the time to review and readjust your budget monthly until you find a plan that works for you. Most important… Be flexible, give yourself grace, and if something isn’t working for you, change it!