Are you living paycheck to paycheck? It’s time to take control of your finances and plan for economic success! The first step in your financial plan should be creating a budget that you and your family can follow.
A budget is an adjustable spending plan based on our current income and expenses. Budgeting is a simple tool that helps us understand how we spend our money, allows us to set goals, and works to lead us on our financial journey. Learn everything you need to know about creating and following a budget in this helpful guide!
How to Assess Your Current Financial Situation
The first thing you should know is how much money you generate in a period of time. This includes both personal and family income.
To get started, learn to identify the difference between gross and net income (mentioned below).
- Gross income: The total amount you earn before taxes and other deductions.
- Net income: The amount you receive after taxes and other deductions.
When creating a budget, use your net income instead of your gross income, as it is the amount of money you will have available. Also, include your partner’s income and the income of other family members that contribute to your household expenses.
Keep in mind: If you receive any additional income, such as special bonuses, commissions, or overtime pay, categorize it as extra income rather than net income. Extra income can be used as additional funds for savings accounts or paying off debts.
Now that you have identified your monthly net income, it’s important to organize your monthly expenses. There are three types of expenses to consider: fixed, variable, and discretionary.
- Fixed expenses. Costs which remain at the same amount from month to month — like rent or mortgage payments.
- Variable expenses. Expenses that can vary from month-to-month and person-to-person, such as buying groceries, paying utilities, etc.
- Discretionary expenses. Non-essential expenses that you can generally live without, such as buying clothes, eating out, buying gifts, etc.
Once you’ve identified your income and expenses, you can better evaluate if your spending is aligned with your available funds or financial goals. If not, it’s recommended to make changes to the budget so that you can achieve your goals and enjoy long-term financial success!
How to Create a Budget
A budget is about making smart financial decisions and setting limits. It can be as simple as placing a limit on your monthly discretionary expenses or reducing your variable expenses by following a plan (saving on electricity or water, for example).
A budget can also help redefine our fixed expenses. For instance, it may be a better option for you to pay a higher rent so that you live closer to your workplace and drive less. You could also opt to reduce your rental expenses by living further away and purchasing a hybrid vehicle in order to save on gas costs. The most important function of your budget is knowing how much money you have available to cover your monthly expenses without having to sacrifice your needs.
How to create an income plan
Before you can start spending or saving, you need to have a clear idea of how much money you have at your disposal.
- Start by evaluating your fixed income, which is the amount of money you are paid from your work. Your fixed income is calculated by deducting federal and state taxes, social security, health insurance, and 401k, among other deductions from your gross income. You can find this information in the form of a pay stub or other document provided by your employer during the pay period.
- Repeat the same procedure with your partner’s income or any other family member contributing to your household income.
- List any additional income, such as overtime pay or bonuses. Once again, be sure to add this amount to your net income and not gross income.
- List any other sources of income, such as investments, property income, child support, pension, social security payments, unemployment, etc.
- Remember that you must report your income to the IRS and possibly pay taxes. Check-in with your tax advisor to define how much you should set aside to pay your taxes. Remember, the amount you may owe the IRS is deducted from your annual gross income.
- Add up your total net income from every income source.
- You now have a figure that represents your total monthly available income.
Keep in mind: Set aside the amount you should pay towards taxes each month before spending. This is beneficial to you in case you have any unexpected expenses or debt that needs to be paid. One great way to save for future tax payments is to deposit this amount into your savings account and leave it there until it's time to pay your taxes.
How to create a spending plan
Creating a spending plan is the best way to stay in control of your finances. Just follow these easy steps:
- Start by writing down your monthly net income as calculated before.
- Deduct your monthly fixed expenses. These may include your rent or mortgage, car payment, insurance, etc.
- Deduct your variable monthly expenses. You can find this number by adding together the total amounts indicated on your electricity, gas, water, and phone bills (among others). Don't forget to include your minimum credit card payments!
- From the remaining amount of income left to spend, decide how much will be spent on paying off debt or how much will be devoted to discretionary expenses. For example, decide how much you want to spend on your child's birthday gift or entertainment for the whole family. Also consider if you have any additional expenses for that month, such as buying new clothes or school supplies. Be sure to take note of all of your expenses and set spending limits. For example, if you budget $200 for clothing, be sure to stay within your spending limits and avoid overpaying.
- Save a certain amount each month for emergencies or reaching a specific financial goal.
Set your financial goals
In addition to calculating your income and expenses, we recommend setting some financial goals. These can be short, medium, or long-term.
- Short-term goals are set to be achieved in less than two years. For example, taking your family on vacation.
- Medium-term goals are goals you want to achieve in two to five years. For example, buying a new car.
- Long-term goals are goals you want to achieve in more than five years. For example, saving for retirement.
When you set a goal, ask yourself the following questions:
- What is the cost of your goal?
- How much money can you save each month?
- How long will it take to reach that goal?
- What is the best savings plan?
Reach out to a financial advisor to determine the best savings account or bank account that helps you reach your financial goal.
Once you’ve determined the amount you’ll need to save each month, be sure to add it to your spending plan. Pay this set amount just as you would with your other expenses. Stay focused on reaching your goals!
Live According to Your Means
Being in control of your finances starts with knowing how much money you have available and how you should spend it. Be firm in your financial decisions and stand by them. Know exactly how you can reduce your expenses and save towards your needs or goals.
One practice that will undoubtedly improve your finances is avoiding overspending. You should be able to differentiate between needs and wants. Ask yourself, do I really need to buy that new TV? There is nothing wrong with spending, however, it should always be within your planned budget.
The peace of mind of being able to afford all your expenses and the pride that you will feel in achieving your goals are worth so much more than a one-time splurge. Live within your means and see how much more you can do with your money.
Create a Budget Today!
Now that you’ve learned the basics of how to create a budget, we invite you to put what you've learned into practice. At SABEResPODER, we’re here to help you, so please contact us by clicking the green button that appears in the lower right part of the screen if you have any questions. Get closer to reaching your financial goals and start budgeting!