How to create a budget quickly and easily
Creating a budget can help you achieve financial freedom. A budget tells you how much money you can afford to spend on everyday necessities and extras, such as dining out.
How to make a monthly budget starts with creating a list and adding up your monthly income sources and your monthly expenses. Make sure you know exactly how much money you need to pay your bills each month. Then compare this to how much money you earn each month. The difference between the two sums (what you earn minus what you spend) can be put into a savings account or used to pay down or pay off any high-interest debt you may have.
Financial experts recommend saving 20% of each paycheck. Looking at the numbers you can see where you can cut expenses to increase savings.
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What is a budget?
The U.S. Federal Trade Commission defines a budget as a plan you write down to decide how you will spend your money each month.
A budget helps you make sure you will have enough money every month. Without a budget, you might run out of money before your next paycheck.
A budget shows you:
- How much money you make
- How you spend your money
Why is budgeting important?
Knowing how to budget and save money goes together. This is because a budget is an important tool to help prevent you from overspending. Understanding budgeting basics and sticking to a budget will help ensure that you have enough money to pay for necessary expenditures such as groceries, rent or mortgage, phone bills, credit card bills, and other everyday expenses.
The goal of personal budgeting is to be able to pay your bills on time and still have money to put aside for
savings.
If you want to
save money fast, creating a budget is an essential first step.
Budgeting for beginners is essential to building savings, building good credit and eventually saving money for a new
home or car, or other significant expenses.
How to create a budget step-by-step
Calculate income. Add up your take-home income each month.
List monthly expenses. Next, add up your monthly expenses. Include everything you regularly buy in a month, including groceries and household items, food, fast-food and restaurant spending, phone and utility bills,
auto loan/auto insurance, health insurance, credit card payments, cable/Wi-Fi services, student loans, rent/
mortgage, gym membership and all other monthly expenses.
Do the math. Subtract your total monthly expenses from your total monthly take-home pay. How much is left? You should have enough money left to put some aside in a savings account or emergency fund.
Track spending. If after you pay your monthly bills you aren’t putting much money aside for savings, you will need to closely track your spending to see where you can cut back.
Create short and long-term goals. Setting financial goals is a key to financial security. Creating a budget that includes a savings goal will help you
save for a new car,
save money for a down payment on a home, pay for a wedding or vacation, or save for retirement.
Research different budgeting strategies. There are numerous strategies for creating a budget, including:
The envelope system. This system is exactly what it sounds like; you’ll divide your money into different envelopes to cover different categories of expenses, such as groceries, rent, gas, entertainment. Online banking features let you create digital envelopes. Once the money from a particular envelope has been spent for the month you should try not to borrow from another envelope. Extra money left over means your expenses were within budget. If you come up short, you will need to cut back on spending in that category.
50/30/20 Rule
U.S. Senator, Elizabeth Warren created the 50/30/20 budget rule, which was published in the 2005 book titled “All Your Worth: The Ultimate Lifetime Money Plan,” which she co-authored with her daughter Amelia Warren Tyagi. The rule states that everyone should divide their after-tax income into three categories to meet your various financial needs:
- Fixed costs/needs (50%)
- Discretionary funds/wants (30%)
- Financial goals/long-term savings and paying-down debt (20%)
The two-account plan. Using two accounts for budgeting keeps expenses and savings separate. Separating your money, whether using envelopes or accounts, provides a frame of reference for how much you have available to spend. Maintaining a separate savings account lets you see how much you are saving, and it feels good as you reach your savings goals.
Zero-based budgeting plan. In this strategy your income minus your expenses should equal zero. The goal is to account for every dollar you spend. Reaching zero isn’t bad. It means your money is accounted for, including the funds you’ve deposited into your
checking account,
money market or savings account, or your
retirement account.
Cut unnecessary expenditures. It’s important to pay your bills and debts on time so you don’t pay late and damage your credit score. Cutting unnecessary expenditures could include reducing your cable TV/streaming services, not dining out or purchasing fast food, eliminating subscriptions, etc.
Automate your savings. Most credit unions and banks offer a feature called automatic bank account transfers that lets you automatically have money moved from your checking account into savings. This makes saving easier. Use your budget to determine how much money you can afford to move into savings each month, being sure to leave a “safety cushion” of money in checking just in case
.
Adjust spending to meet goals. If you’re meeting your savings goals, great! If not, you will need to spend less each month.
Track progress. Be sure to monitor your checking and savings accounts to make sure you have the money you need each month to pay your bills in full, so as not to accrue debt in the effort to save money. You may realize that you’re able to put more into savings, or you may need to reduce your savings to have a better bill-pay cushion. Don’t worry. All efforts to save money are a great step forward, no matter how much you contribute.
Pay yourself first.
Paying yourself first is an effective strategy for saving money that can then be used to improve your financial situation. Paying yourself first can reduce the temptation to spend your money, especially when you see your savings account balance growing. This is a critical step to succeed with personal budgeting.
Stick to the plan. Financial budgeting works best when you stick to your plan.
Whichever budgeting strategy you choose, you’ll know it’s right for you when you see your savings account or retirement account balance increasing.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
Apply for Membership at CU SoCal Today!