Want to learn how to plan your budget wisely? You wouldn’t have landed at a better place!
We all know how important it is to save money. But most people don’t actually know how to do it properly while planning their personal finance.
Smartly spending and saving money can help you deal with stress and make you feel more in control. It not only protects you in the event of a financial emergency but also helps you avoid debt.
If you want to control your spending, reduce stress, and work towards your financial goals, you need a budget. It’s one of the most important ways to save money. It also helps you spending money wisely and notice bad money spending habits. The ideal age for parents to introduce the concept of budgeting to their children is eight. So, they can learn from their mistakes and make budgeting a habit.
Regardless of how much money you make, you need to keep track of where the money is going, which you can’t do without budgeting your spendings.
Whether you want to pay off your student loan, deal with a financial situation, or build an emergency fund, a budget can help you achieve it all.
Budgeting, or what we call a personalized content can help you save money for various reasons. Think of budgeting as an ultimate lifetime money plan.
Getting started with your first budget might seem complicated, But, we are here to share the step-by-step guide on budgeting wisely. Before jumping in, let’s talk more about the benefits of saving money.
10 key benefits of saving money
Provides control over your money
Budgeting is important, especially if you want to control money rather than the money controlling you. Having no clue regarding where your monthly income is going can be stressful.
Budgeting helps you track your spending so that you can have control over your money. Budgeting is a great way to help you spend money wisely. Without figuring out where your money is going, you will not be able to limit overspending and notice your bad money spending habits.
Say, through budgeting, you get to know that your gym membership is costing you more than it should. This way, you will be able to apply market research for cheaper alternatives around you and save money.
Help you save for retirement
If you want to lead to a happy retirement, make sure you spend money wisely and follow the budget to a T. Following your budget to a T is not everything you have to do. You want to also make sure you contribute to your IRA, 401(k), or other kinds of retirement fund.
Keep in mind that the more you contribute to your retirement fund, the more comfortable and easier your early retirement will be.
Makes talking about money easier
Talking about finances with the people around you can sometimes feel challenging. It shouldn’t be, but that is how it is. It might come as a surprise to you, but money issues are a leading cause of marital problems. They are also considered as one of the main causes of divorce.
Whether you are a parent or a partner, budgeting makes communication about money easier and helps reduce the overall stress surrounded by money conversations.
Keeps you focus on your financial goals
Without budgeting, you will never know where you have to cut back. It not only helps you avoid spending on unnecessary services and products but also helps you track your financial goals. By budgeting, you will be focusing money on the things that are most important to you.
Whether your financial goal is to pay off debt or save for retirement, a budget can help you achieve it.
Sets your priority and prevents overspending
A budget helps you set your financial priorities and prevents overspending. It provides a broader financial picture by putting purchases in the context of income, which not only helps you set your priorities but helps you limit overspending too.
As you sit down drawing a budget, you will see how much you are spending on eating out every month. This will help you limit your eat-outs, and you might consider cooking your own meals.
While budgeting, make sure you ask yourself these questions:
- Do I want to live debt-free?
- Is having a vacation every year important to me?
- What are my short-term and long-term goals?
For example, if you think you are spending more on clothes than you should, you can save money by searching for and shopping at local shops. Your phone can use your precise geolocation data to find affordable brands near your location.
Tells you where the money is going
By knowing where your money is going, you will be able to plan ahead for emergencies.
To save money, you need first to know where your money is going in the first place. Budgeting helps you find the areas to save money. Whether you are spending too much money on eating out or buying more groceries than you need, a budget sheds light on unnecessary spending.
Helps you save for emergencies in your savings account
From getting laid off to falling sick or a deer jumping in front of your car, there’s a lot that can go wrong. The last thing you would need is not to have money in the case of an emergency. Establishing an emergency fund for unexpected expenses is extremely crucial. Part of budgeting is to ensure that you have enough money to pay for unexpected expenses.
While creating an emergency savings fund, keep in mind that you need to have five to six months of living expenses. The amount in your savings account shouldn’t go below $1,000.
Makes you aware of your bad spending habits
Budgeting doesn’t save you from bad spending habits, but it surely helps identify your bad habits. A budget sheds light on your bad spending habits. You may notice that you are spending more money than you should.
One-third of Americans spend more on coffee than on investing. The average money Americans spend on buying coffee every month is around $92. By budgeting, you will know how much money you spend on coffee or buying breakfast every month. This way, you can cut back a little and work on your bad spending habits.
Organizes your spending
Organizing your spendings can be really difficult. A budget helps you break down all your expenditures such as internet, groceries, electricity bills, etc. This way, you will be able to quickly view how much you are spending on services.
By dividing your money into categories of your financial resources and expenditures, you also get to know where your money is going.
Helps you invest
Saving the money left in your account by the end of each month is a failed strategy. If you want to live a happy retirement, it’s important for you to plan your savings properly.
Investing money provides a regular monthly income and is a great way to have your money back. Around 39% of Americans have never invested in the stock market. While drawing a budget, make sure you plan how much money you need to set aside for retirement and investment.
A step-by-step guide on how to plan your budget wisely
Alt-Text: How to Plan a Budget that You Can Stick to
Set your financial goal
The first thing you need to do is set your financial goals.
Creating financial goals is important to help you plan how you will save and spend your income.
The most common and important financial goals are:
- Debt repayment
- Saving for traveling
- Saving for retirement
- Creating an emergency fund
- Building wealth
- Buying a home
- Starting a company
- Pay off personal loans
- Earning money through a side hustle
- Saving a certain amount of money by the time you reach 40
Make sure you set realistic goals because your goal should be drawing a budget you can stick to. You can also ask yourself what you want your finances to look like in a year or two.
Process personal data and add up your income
The second step is to note down your income. If you get a regular paycheck through your employer, where taxes are automatically deducted, you should note it down as net income. But if you have automatic deductions for insurance, savings, or 401(k), access information regarding the premium fee and subtract these deductions to have a clear picture of your take-home pay.
People with multiple streams of income need to add and figure out their after-tax income.
|Income Streams||Monthly Payment|
|Full-time content writer||$6,000|
|Working part-time on freelancing sites||$30 per hour|
|Weekend photography gigs||$2,000 per wedding|
To add the amount you have earned as a part-time writer and freelance photographer in your budget, you will consider the lowest-earning month in the past year as your baseline income.
Calculate your living expenses
After calculating your after-tax income, you need to calculate your monthly spendings.
The expenses could include:
- Premium fee of insurance
- Property tax (if not already included in the mortgage payment)
- Auto insurance
- Health insurance
- Out-of-pocket medical costs
- Life insurance
- Electricity and natural gas
- Eating out
- Child care
- Student loan
- Personal care
- Other utilities
- Car payment
- Alimony payments
- Public transportation
- Out-of-pocket medical bills
Keep in mind that breaking your monthly spend into specific buckets is extremely important. You can create three to four main groups like food, housing, transportation, and utilities. Then, you can either create sub-groups or additional buckets like dining out, traveling, and clothing.
Make sure you divide fixed expenses and necessary monthly spendings.
Draw a budget
It’s better that you note down big-ticket items first.
Access information and note down the after-tax income and use fixed and necessary expenses to draw a budget. You will then get a sense of how much you will spend in the coming month. With your fixed expenses, you will be able to predict how much you will save and have to plan a budget for.
Fixed expenses are easier to label on the budget as they are month-to-month costs. For the variable expenses, you will have to calculate the average cost.
You can also create a budget with a credit card. Budgeting with a credit card helps you manage your cash flow by granting you a month to pay back and track every spending you make. Keep in mind that you will have to pay interest charges if you pay less than the full balance after the payment due date. The interest rates on most credit cards change from time to time.
You can also use a budget bank account to set money aside to cover electricity bills and mortgage payments. Also, keep in mind that a high-interest savings account is a great compound interest investment to grow your savings.
Separate needs and wants
Make sure you set your priorities for yourself. Think of needs as the things that are required for survival. On the other hand, wants are desires for goods and services that help you live more comfortably. Wants are the things you don’t need but will love to have to make life more enjoyable.
The most common expenses that are considered needs include:
The expenses that fall under wants include:
- Gym memberships
- Sports car
- Designer clothes
- Luxurious decorative accessories
- Upscale dining
While creating a budget, divide your expenses into wants and needs. You will keep Netflix subscription and traveling costs under wants, but groceries and transportation under needs. Don’t completely cut out your required expenditure, but try cutting down on your extra spendings.
Keep track of your spending
When it comes to budgeting, proper management is required. After drawing your budget, don’t forget to keep track of your spendings to make sure you are spending money wisely and properly sticking to it. It will help you cut down on your monthly spendings and shed light on your bad spending habits.
Keep in mind that in situations where you have to choose between saving your money and saving time, choose spending money to save time. Studies show that when people spend money to get help with time-consuming chores, their stress levels reduce.
Budgeting is a way to create a balance between your monthly income and monthly expenses. If you want to improve your credit score and financial health, don’t ignore the importance of budgeting.
In situations where your total expense overlaps your income, you will have to cut down on unnecessary spendings. A budget gives you a broader financial picture; it not only helps with debt repayment but also sheds light on bad spending habits.
It’s also possible that you will figure out that the only reasonable option you have is to increase your income by either working overtime or applying somewhere else.
Budgeting helps with debt repayment and spending money wisely. It ensures that you always have money for the things you need. By budgeting wisely, you might not have a hard time sticking to it. If you have a hard time getting started, get yourself some personal finance books that have signaled globally the importance of budgeting.