Creating, balancing, and maintaining a budget is one of the crucial life skills to learn as an adult. Without knowing how much you have from week to week or month to month, there is no realistic way to plan for a financial future or have the security of knowing your bills will be paid on time.
The first step towards creating a budget is understanding exactly how much income you have before all required bills need to be paid. Your expected income should include employer wages, investment income, self-employment income, and other sources. Be sure only to include your after-tax wages. Next, it’s time to examine expenses. A great tool is to turn to your previous credit card and bank statements. Your financial institution automatically provides many online tools, offering a handy breakdown of prior purchases into groupings. Within an instant, you can see what percentage of your income is spent on groceries vs. medical expenses, etc. With your expected income and your typical expenses now in-hand, it’s time to move forward with the two types of expenses to budget for needs vs. wants or non-discretionary vs. discretionary expenses.
Non Discretionary expenses are the necessities you must pay for, such as mortgage or rent, car payments, electricity, gas, cable, and cell phone charges. Discretionary expenses are the luxury “wants” that we enjoy, such as entertainment, dining out, or gym memberships. This is entirely up to. You might choose to save for a future goal or put your remaining money away for a rainy day or an emergency. Some people create a discretionary fund to engage in self-care, such as shopping or vacations.
Once you have written out a budget, it’s also essential to compare it with your actual spending. Just because a budget looks nice on paper, it doesn’t mean it’s reality. Test out your budget for a few months to see how it feels and then make any adjustments. The other important thing to remember is that a budget is a dynamic, ever-changing part of your life. It is not a static chore that you build once and never alter. People’s goals and lifestyles and jobs change all the time, and their budgets should reflect that.
The information provided above is a suggestion. Please seek advice from your financial advisor before making any financial decisions.