A foundation for financial stability starts with a rock solid budget. Establishing an effective budget can be a daunting task if you’re not sure where to start. What expenses do you need to consider? How are you tracking your spending? Where should you make cutbacks first? Understanding the budgeting basics is critical if you hope to eliminate debt.
What is a Budget?
It’s a common misconception that budgeting just means pinching pennies and depriving yourself of enjoyment for the sake of saving money. In actuality, implementing an effective budget is the best way to increase the likelihood that you’ll have the funds available to have fun even after you’ve paid for all of your bills and other expenses.
On a fundamental level, a budget is a comparison between how much money you have coming in versus how much is going out. By tracking cash flow, you can prioritize spending to ensure there is cash left for what matters to you. If you’re managing credit card debt, it can make a world of difference.
To better understand the budgeting basics, let’s look at how to getting started.
Budgeting First Steps:
- Find a Budgeting Resource – If this is your first attempt at budgeting, find a guide to help you get started. Using a budgeting worksheet is a great way to understand what financial information is needed.
- Calculate Household Income – Figure out how much money you have to work with. This includes combined take-home pay from everyone who will contribute to paying expenses. You should also add in any money from side jobs or other sources.
- Add Up Fixed Expenses – Fixed expenses are the essential living costs that do not change from month to month (i.e. rent, phone, loan payments, etc.). These are the easiest to subtract from your income in order to know how much is left for other expenses.
- Estimate Variable Expenses – Critical expenses that can fluctuate in cost are variable expenses (i.e. utilities, groceries, gas, etc.). Since these payments vary, you need to look back at how much they cost in previous months or track payments for a month or two. Then you can estimate a normal amount and subtract that from the remaining income.
- Evaluate Discretionary Expenses – Entertainment and other nonessential spending accounts for your discretionary expenses (i.e. cable TV, dining out, beauty products, etc.). These need to be examined once you determine how much is left after paying for essential monthly expenses. If spending is greater than what you earn, these are the costs to cut first.
Understanding how these different costs fit into your budget and calculating an accurate total for each requires you to track your spending. Use a digital spreadsheet or a paper ledger to write down every transaction type and the amount and consider saving receipts. Being committed to tracking payments makes for a more precise and effective budget.
Actively monitoring where each dollar is going helps build awareness of spending habits. If you pay attention to how money is being spent, then each purchase gets ranked in importance, which allows you to make cuts and prioritize your financial goals.
Budgeting Basics: Drawing Conclusions
Once you take the first steps to implement your budget, it’s time to figure out what adjustments to make. Whether you decided to budget as a debt solution or to build savings, reducing your expenses is a necessary step.
First, take a hard look at those discretionary expenses. If you’re serious about your financial goals, then eliminating or reducing some of these costs can free up cash for better uses. Choose what you can live without.
Next, look into options for reducing your variable expenses. Turn off lights more often. Use fans instead of running the AC all the time. Ride your bike to work. All of these activities combined add up to significant savings.
Lastly, stick with it. The hardest part is getting started. Keep a watchful eye on how every dollar is used to avoid overspending where possible. Think about whether each purchase is truly necessary or if you can lower a bill next time around.
Once you master the budgeting basics, getting out of debt and reaching your other financial goals is just a matter of time. Start building the foundation now to secure financial stability for years to come.
To speak to a credit counselor today about budgeting and managing your finances, call 800-769-3571.