Spring has sprung, and so has a new fiscally reasonable you. Start the new season on the right foot by establishing a monthly budget for yourself. If you are thinking to yourself, “I don’t need a budget. I’m fine how I am,” then either you probably aren’t thinking about saving or are very, very wealthy, in which case you could still benefit from budgeting. Having a monthly budget can help everyone. Whether you want to start investing so you can earn a passive income, establish a retirement plan, save for a once-in-a-lifetime trip, or save for a down payment to buy a home, all of these goals and more take planning to achieve; otherwise, they may never happen. These five steps will help you establish a monthly budget for the rest of 2021 and also teach you how to stick with it.
1. Gather All Your Papers
I’m talking about credit card statements, rent and utility bills, tax returns, pay stubs, loan payments, and receipts. Collect all these pieces of paper or electronic forms of information and have them at the ready. You will need these to create an accurate monthly budget. Even though you may pay taxes only once a year, you still need to make sure you have the money, later on, to pay them off. The more information you can gather, the better the monthly budget you can create.
2. Figure Out Your Income
Whether you have been in the same job for 10 years or are freelancing, you can still predict your income for the year no matter what employment status you have. It is important to remember that your budget will change based on what is happening in your life. Right now, let’s just focus on what you know.
If you have a job where your taxes are taken out of your paycheck, the number you need to know is your net-income (also known as your take-home-pay). If you are self-employed, getting unemployment or social security checks, or making money in another way, these types of income will still need to be noted.
3. Calculate Your Monthly Expenses
There are monthly expenses that you can account for happening. Every month you will need to spend money on crucial areas of your life such as housing, food, taxes, and other things. You can break these down into simple categories to make your budget easier to manage. For example, under housing, you can have utilities, internet, electricity, and rent or mortgage payments. Main categories can be housing, fun money (such as entertainment and eating out), food, transportation, and debt payments. The Muse has a tool that will help you create a template for your budget.
4. Which Monthly Expenses are Variable or Fixed?
There will be another set of two categories within your monthly expenses: fixed costs and variable costs. Fixed costs are monthly recurring expenses that are usually around the same amount and happen habitually. For example, things like rent, student loan payments, car lease payments, and utility bills fall into this category. Variable costs vary in amounts, such as groceries, clothing, entertainment, and travel. Maybe you need to travel at least once a month to see your family. It is variable because it may or may not happen and at different costs when it does happen. This variable category is the area where you can make the most adjustments to your budget.
5. See Where You Stand
Now is the time for the truth. Compare your total income against your total expenses for the month. If the income is greater than the expenses, then you are at a good starting point. This excess money means that you have leftover cash to do something with each month. Depending on your financial goals, you can save the money in a retirement fund like a 401K, a travel fund, or a rainy day fund. Alternatively, it is never too early to start investing, and there are so many ways to do it as well. Or you could just roll the surplus money over to the next month’s budget so that you can have more wiggle room.
However, if your expenses are greater than your income, then it is time to reevaluate your variable costs and some of your fixed costs. Try to cut back where you can. If you notice you are eating out more than the nights you are eating in, try to cook at home more often to save money. A tried and true rule of thumb when renting is that rent shouldn’t be more than 30% of your budget. If it looks like it is more, maybe think about moving to a more affordable neighborhood in the future. There are plenty of ways you can quell your spending in certain categories, so take a look at your expenses and see where cutting back makes sense for you. Alternatively, you could try to work more hours at your job or get a second job if you cannot cut back on some of your expenses.
How to Stick to Your Budget in 2021
Establishing your goals can help you see the bigger picture of why you need to have a budget. If you are trying to save for a down payment on a house, looking to go on a trip, or buying yourself an expensive gift, these goals will help remind yourself why you are not spending as much as before. There are plenty of ways you can keep to your budget, one of the most essential tools you’ll need is some way to record your expenses. Whether you have a checkbook (yes, Gen Z those are real things), a budgeting app in your phone, or just a notebook, as long as you have some system with you on-the-go to record deductions to your budget, you will be more informed as to how much you have to spend. If you have a credit card or debit card, it can feel easy to break your budget. Why not try taking out a certain amount of money in cash instead so that you physically limit your spending. If you don’t have the physical cash on you to buy the item, then you should know you’d be breaking your budget.
If you are interested in becoming a first-time homeowner in 2021 and want to learn more about achieving this goal, check out our blog posts or talk with one of our Loan Officers.