As the cost of living continues to rise, many are facing increased financial pressure.
With essential expenses like housing, food, energy and fuel at an all-time high, careful financial planning is becoming more critical than ever.
Brean Horne, a personal finance expert at NerdWallet believes creating a budget can help to balance your income with your financial commitments and aspirations. She shares her simple step-by-step guide for making a budget with us here:
What is a budget?
A budget is a plan for every pound you have, allowing you more financial freedom and much less stress. Here’s how to set up and then manage your budget.
Step 1
Calculate your monthly income and pick a budgeting method to help you monitor your progress. Any budget must cover all of your needs, including savings for emergencies and the future.
Budgeting plan examples include the envelope system and the zero-based budget:
The envelope system is when you take the different types of expenses you have and sort them into categories. You can decide how broad or specific to be here. You can have a general “going out” envelope, for example, or you can have a “movies” envelope, a “restaurants” envelope and a “drinks” envelope.
Zero-based budgeting is a method that has you allocate all of your money to expenses, savings and debt payments. The goal is that your income minus your expenditures equal zero by the end of the month. You can build your zero-based budget with an app such as Goodbudget — or a good old spreadsheet or pen and paper.
Step 2
Once your plan is confirmed, start by allowing up to 50% of your income for needs.
Your needs should include:
- Food shopping
- Rent/Mortgage payments
- Basic utilities
- Transportation
- Insurance
- Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category.
- Child care or other expenses you need so you can work
If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. It’s not the end of the world, but you’ll have to adjust your spending.
Even if your necessities fall under the 50% cap, revisiting these fixed expenses occasionally is smart. You may find a better cell phone plan, an opportunity to refinance your mortgage or less expensive car insurance.
Step 3
Leave 30% of your income for wants. Whilst separating wants from needs can be difficult, life is all about balance and every budget needs some wiggle room.
In general, needs are essential for you to live and work, whereas typical wants include dinners out, gifts, travel and entertainment.
If you’re eager to get out of debt as fast as you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldn’t be so austere that you can never buy anything just for fun.
Step 4
Try to commit 20% of your income to savings and debt repayment. This 20% should be put away for the unexpected – maybe a car fine, or a household repair.
Make sure you think of the bigger financial picture; that may mean two-stepping between savings and debt repayment to accomplish your most pressing goals.
Step 5
Also, try to automate your savings so the money you’ve allocated for a specific purpose gets there with minimal effort on your part. An online support group or financial advisor can help so that you’re held accountable for choices that blow the budget.
Step 6
Finally, track your progress. Always ensure you record your spending or use online budgeting and savings tools and if you slowly start to notice your bank account feeling a lot more healthy, then your plan is working!
If not, it may be worth rethinking the type of budgeting plan you use and starting fresh. Remember, budgeting is a long-term process and something that can’t be rushed, so be patient and persistent!
