Creating and sticking to a budget is one of the most important things we can do to take control of our finances, yet so many people try to operate without one because they believe they're too restricting, too hard to create, or take too long to master.
The truth is, budgets help you minimize financial stress, give you a clear plan for your money, and help you accomplish your money goals much faster. With a little bit of practice, you can easily create a one and master how to use it in no time! There are also services like ours out there that can build customized budgets for you if you need help.
In this article, you'll learn how to create a budget that is easy to stick to.
1. Understand Your Financial Situation
Before you can put together your budget, you need to know your numbers. This includes how much net income you bring home a month, how much debt you have and what you need to pay towards minimums, how much you typically spend per month on your expenses, etc. This can easily be done by reviewing your bank/credit card statements from the last three months and categorizing them to create averages for your unique budget categories.
Note: If you have a variable income due to being a contractor or freelancer, take a look at the last few months of your income and average it out or take the worst possible case scenario and build a budget based on that.
2. Set Financial Goals
Once you have a solid understanding of your monthly income and expenses, it's a good idea to come up with some financial goals that you want to achieve in the short and long-term. Doing this will help you stay focused and motivated to stick to your budget, and it will also give you some sort of direction for your money. If you don't know what you're saving for or what you need to pay off, you'll most likely spend your money on things that move your further away from your ideal financial future.
When setting your goals, be sure to attach a timeline and dollar amount to each one. Your goals should be realistic and specific. For example, "I want to save $8,000 for a car by April of 2024."
3. Craft Your Budget
Make a list of all your fixed and variable expenses based on the information you've gathered from assessing your financial situation and your goals. If you notice that the amount that you're spending exceeds your monthly income, it is time to cut back. The first area that you can likely find some extra room will be in your variable expenses (e.g. shopping, self-care, dining out, entertainment).
If you would like to receive a financial situation assessment and customized budget, sign up for our 1-time budget creation service and we will do all of the heavy lifting for you.
Debt Management Strategies:
Now that you've built a budget that works for you, you can develop a plan to pay off your debt! A budget is the single most important financial tool that you can use to get out of debt because it allows you to determine how much debt you can afford to pay off each month.
There are two main strategies that you can use to pay off debt: the avalanche method, and the snowball method.
With the debt avalanche, you start by paying off the debt with the highest interest rate first, because it saves you the most money in the long-run. While the avalanche method makes sense mathematically, we recommend the snowball method. This is a strategy where you list your debts from smallest to largest without considering interest rates, and you make minimum payments on all of them except the smallest one. You apply all of your extra money towards the smallest debt until you have it paid off, and then apply that payment to the next smallest debt, and you continue on until everything is paid off.
Paying off your debt allows you to allocate more money towards the things you actually enjoy, which is the ultimate goal: freedom.
If you need help developing a debt payoff plan, click here.
Additional Tips for Success
Stick to your budget: Once you create your budget, try your hardest to stick to it. That means prior to going out, refer back to the budget to see how much you’re allowed to spend that month. It means you may have to miss out on your favorite brand’s sale this month. It isn’t easy to stick to your budget, but your future self will thank you once you're able to achieve all your goals.
Track your progress: Especially in the beginning, you’ll want to pay close attention to how your budget is working for you. Is there anything you need to adjust? Anything that was forgotten? If you find that you’re consistently going over budget, figure out how you can cut expenses to meet your goals faster.
Avoid going further into debt: This is self explanatory. If you want to stick to your budget and get out of debt quickly, don’t accumulate more debt. If you do, you’ll just be digging yourself further into a hole, and you’ll have to allocate more of your funds towards payments versus your other goals.
Budget BEFORE the new month begins: Before the month even starts, you will want to create a plan for your money. This will help you avoid spending money by accident and give you total control over your finances.
Give yourself grace: Remember that each month is going to be different and there will be some where you follow your budget exactly, and others where you go over. Your personal finance journey is lifelong and it’s not always going to be perfect. If you make a mistake, just figure out why and try to avoid making it the following month. What matters most is that you're giving it your full effort.
Conclusion
Everyone needs to budget, regardless of how much money you make or what stage of life you’re in. It can help you work towards your financial goals, get out of debt, and save more money quickly. Most importantly, budgets give you a plan for your money. If you need help creating yours, reach out to us here and we will help you get started today!
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