Back to Basics: How to Create (and Stick to) a Budget
For many, the recent global health crisis has thrown us a financial curveball. With any budget, and especially with the amount of uncertainty at large, it’s important to periodically examine your finances to make sure you are optimizing your assets and preparing for the future. If you do not currently have a budget, this is a great place to start. Read on for tips to create, and live by, a budget.
Calculate Your After-Tax Income
In order to know how much money you have to spend, you first need to know how much money is coming in. While you could refer to the dollar amount on your paycheck, it is important to have the full picture. It’s recommended that you fully examine your situation; take a look at your income statement and find any deductions such as 401(k) contributions, health and life insurance. You will want to add those back into your income and then make sure you account for those items in your budget. If you have multiple sources of income, be sure to do this with all sources and record all income.
Choose a Budget Plan
While creating a budget may sound pretty basic, there are many different options of budget systems to use and finding the one that works for you and your goals is incredibly important. Here are a few examples of different budgets for you to research before getting started:
- The 50/30/20 Budget
- Best for: Getting started with budgeting
- Budget Basics: This budget method splits your income into three categories; necessities, wants and savings/debt repayment. The numbers in the title of the budget stand for the percentages dedicated to each category. In this case it shows 50% going to necessities, 30% going to wants and 20% going to savings and/or debt repayment. This basic budget is great on its own or for layering with other budgeting methods as you get more comfortable with the process.
- The Envelope System
- Best for: Gaining control of spending habits
- Budget Basics: This budget is great for anyone who has spending habits they are trying to reign in. The goal is to reduce frivolous spending by allocating cash in envelopes to each expense category. When the cash for that category is gone, your spending for the month on that item is done. If you would rather not deal directly with cash, there are online systems you can target that use the same method digitally. A quick Google search will turn up some great options.
- Pay Yourself First
- Best for: Building savings
- Budget Basics: In this budget you prioritize savings before spending. You decide how much you will set aside for savings and then the remainder is what you have for bills and other costs. This method forces you to really focus on your spending to make sure you are not leaving yourself short.
- The Zero-Based Budget
- Best for: Optimizing Your Dollars
- Budget Basics: In this method you allocate every dollar of your income so that you know exactly where every cent is spent. Making sure every dollar has a purpose will make sure you are being intentional with your spending and tracking is the key to success. This method begins and ends with logging every transaction, so if you are not meticulous about your tracking this may not be the method for you.
Track Your Progress
Once you have decided on a budget plan that works for you, figure out how you are going to track it. Some people prefer digital options while others like the feeling of having things on pen and paper. Whatever your preference, there are tools to help you on your way. As you are researching the budget plan options, look for tools recommended for that particular plan as certain plans will work better with certain tools. Whatever plan and tracking method you choose, be sure to be consistent. You do not want to put in all the effort and fail on the follow-through!
Revisit Your Budget
We have discussed why you should budget, finding a budget plan and tracking your budget. But what else should you do once everything is set up? One of the biggest things is to make sure you are checking up on your budget regularly. Any time your income or expenses have a change you should be running the numbers and making adjustments. At a minimum, you should be re-evaluating your budget and your progress quarterly in order to make any adjustments before you get too far off track one way or another.
Want to see how homeownership fits with your budget? Call Cambria Mortgage today at 952-942-0110 to speak with a professional Mortgage Consultant who can help you run the numbers and make your dream home a reality.