Updated: Oct 29, 2021
Making and sticking to a budget is one of the best decisions you can make for your financial future. Taking a close look at your finances might be scary, but creating a budget can help you feel more in charge of your finances and save money to accomplish financial goals. Furthermore, after you've put in the time to create your budget, you'll be able to manage and change it as needed simply. So, how do you go about making a budget? Here are 5 simple steps to help you get the job done!
Step 1: Calculate Your Monthly Income
Calculating your monthly earnings is an essential first step in building a budget. You'll need to figure out your net income, which is how much money you make after taxes. If you receive a regular paycheck through your employer, regardless if you’re part-time or full-time, the amount listed is likely your net income. Also, to get a complete picture of your financial status, enter any other sources of income, such as dividends, interest, alimony, or child support.
Keep in mind that if you have a health insurance plan, a flexible spending account (FSA), or a retirement account via your workplace, the money is frequently deducted from your paycheck automatically. To get a comprehensive view of your take-home income, you'll need to subtract those deductions.
If you freelance, are self-employed or don’t receive a regular paycheck, you’ll need to subtract taxes from your income amount. Your accountant or bookkeeper can help you determine a good estimate of the tax you may owe.
Step 2: Calculate Your Expenses
You likely have a good idea of how much money you make each month, but do you know where it all ends up going? Find out by keeping track of your spending. You may calculate your expense cost using one of two methods. The first is to budget as usual, but note down every dollar you spend and what you spend it on for a month. The second method is to make a list of all the costs you plan to incur over a month. To identify and build the list, go through your bank statements, receipts, and credit card statements from the previous three months. This list will likely include expenses such as:
Mortgage payments or rent
Personal Care Costs
Student Loans Payments
Amount Delegated Towards Savings
Step 3: Determine Which Expenses Are Fixed and Variable
Fixed costs are those that must be paid regularly and for which you pay the same amount each time. Mortgage payments, rent payments, vehicle payments, standard credit card payments, and regular daycare expenses are examples. If you pay a typical amount on any other essential spending that tends to stay the same from month to month, include that as well. Expenditures that fluctuate over time are known as variable expenses. These costs differ according to how you use products or services, and they might fluctuate for various reasons. Entertainment, gas, presents, and eating out are all types of variable costs. If you're not sure how much you spend in each area, look over your credit card or bank statements from the past two or three months to get an idea.
Once you have determined your variable and fixed expenses start assigning a spending value to each category. Begin by assigning your fixed costs, and then figure out how much you'll need to spend on variable expenses each month.
Step 4: Determine Your Monthly Income and Expenses, Then Make Changes Where Necessary
The next stage in developing a budget is to compare your monthly spending to your net income. If you find that your costs exceed your earnings, you'll need to make some changes. This may include rethinking how much you spend on food, home products, streaming subscriptions, and other recurring expenses. To avoid debt, it's a good idea to cut these expenditures and make frequent modifications to the amount of money you spend.
If, after outlining your costs, you still have money left over, you can raise some sections of your budget. If you don't have an emergency fund, you should utilize this extra money to grow your savings. However, you might spend the money on non-essential items such as dining out or travel.
Step 5: Put Your Budget Into Action
You must monitor and continue to track your spending in each area after setting up your budget, ideally every day of the month. Consider this: Have I budgeted for my basic needs such as food, housing, and so on? Have I set aside funds for debt repayment, unforeseen bills, savings, and travel? By asking yourself these questions and keeping track of your spending throughout the month, you may avoid overspending and identify needless expenditures. Rather than waiting until the end of the month, spend a few minutes each day determining if all of your bases are covered and recording your costs.
Schedule A Consultation with an Experienced Financial Advisor
A budget is a great way to put you on track to reach your financial goals, but it’s not the only step in the process. Here at Fourth Avenue Financial, we want to help you develop, implement, and monitor a strategy designed to address your individual situation to ensure all your investments are setting you up for a path of financial success. Our first priority is your overall financial success. If you are ready to start planning for your financial future, we are here to help. Contact us today at (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule online: https://calendly.com/fourthavenuefinancial/introductory-zoom.
Securities are offered through J.W. Cole Financial, Inc. (JWC) Member FINRA / SIPC. Advisory Services are offered through J.W. Cole Advisors, Inc. (JWCA). Fourth Avenue Financial and JWC/ JWCA are unaffiliated entities.