Congratulations! You’ve landed a killer job, you’re making OK money, and you’ve found the perfect place. So, managing your money should be easy, right? Wrong!
Without a clear budget plan, you could be setting yourself up for financial disaster. Poor financial decisions due to a lack of planning can lead to financial woes, such as bad credit, high debt, and, yes, even losing that cool, new apartment.
Fail to plan and you can plan to fail.
A budget may sound constraining, but it’s a proven strategy for financial stability. Learn how to budget by following these three simple steps.
Determine your true income and monthly spending
Identify your net income, that’s your final take-home pay after taxes, health insurance, 401(k) and other payroll-deductions. This is the money you must work within each month — not that gross salary figure on your job offer letter.
Next, determine how much you spend monthly on expenses in the following areas:
- Housing (rent or mortgage)
- Utilities (like electricity, water, and gas)
- Internet, cable, and phone
- Transportation (like gas, car payment, car insurance, parking and tolls)
- Food (groceries and dining out)
- Personal care (like clothing, shoes, and beauty care)
- Health care (prescriptions, doctor’s appointments, and insurance premiums, if they’re not deducted from your paycheck)
- Child care
- Entertainment (movies, sports, and concerts)
- Other (gym fees, credit cards, student loans, etc.)
To make sure you don’t forget an expense, use your Online Banking to review your expenditures.
Create and maintain a monthly budget plan
Now that you’ve identified your net income and monthly expenditures — write it down.
Create a budget worksheet and use it each month or pay period, before you start spending. This is your budget plan that you will use to guide your spending and keep your finances on track. You can use a budget worksheet, a free budgeting app, or create your own Excel spreadsheet. Just be consistent with your planning.
Reconcile your budget. At the end of the month or pay period, evaluate your budget plan versus your checking balance to see if there’s extra money or not enough money left over. If there’s a surplus (extra money) put it in savings. If there is a deficit (not enough money) take time to go over your expenditures and determine where you spent more than planned. Maybe you underestimated a variable expense — bills that may differ from month to month such as your utilities. Now’s the time to adjust your future budget accordingly. Or perhaps you had an unexpected expense that you didn’t have enough funds to cover. Step three can solve that problem.
Set up an emergency fund
Emergencies happen. The car needs a repair, a loved one gets sick, or worst yet, you lose your job. Don’t jump into the world of financial independence without your safety net — an emergency savings account.
Open a savings account and deposit excess funds into it each month or pay period. Make it a part of your budget plan. To save, you can manually transfer funds from your checking to the savings through online banking, set up automatic online banking transfers, or if you have direct deposit, direct a portion of each paycheck into the account.
You may think you can’t afford to save, but the reality is you can’t afford not to. It’s better to have cash on hand for life’s surprises than to use a credit card, get behind on important bills, or borrow from mom and dad.
If you don’t have money left over to save, reallocate some funds from your personal care and entertainment category or consider getting a part-time job. Also, consider refinancing your high-interest rate items like your home mortgage or car note. It could free up extra cash for your savings.
By following these three easy steps, you’ll build a strong financial foundation.