Budgeting 101: How to Get Started
Definition: A budget is an estimation of your income and expenses over a set period of time.
Creating a budget is the first step towards a healthy financial situation. It will help you track where your spending is going and reduce unnecessary costs where you can. A balanced budget can keep you out of debt by planning ahead for large expenses and making sure you save money for any large purchases.
Tips for Creating the Best Budget
1. Decide why you are budgeting.
I believe everyone should have a budget, but there are different reasons why for every person. Some people overspend and need to better track where their money is going. Others are saving up for a larger purchase and want to plan and see how long they will need to save.
A budget makes it easy to adjust your spending and how much you have leftover.
I'm constantly working on my personal budget, trying to cut as many costs as I can. Having a budget makes my spending and saving more transparent.
2. Prioritize your needs over your wants.
When creating a budget and laying out all of your expenses, you can compare categories of spending which can help make it easier when you need to cut expenses and stop spending on something.
It can help to categorize your spending as a "need" or a "want". Housing, food, and utilities are all probably "needs". Clothes, games, and entertainment costs are "wants" because they're not necessary expenses.
If you need to free up more money for saving, investing, or other "needs", start by reducing spending on your "wants".
3. Decide how much you can save and invest.
When creating a budget you NEED to figure out how much you can save and invest consistently. Even a small amount is better than nothing, but really try to save as much as you can.
Not enough people save money and invest for retirement. It really scares me, because it's so important and it's not that hard. Investing consistently over a long period of time will pay off exponentially over time, and due to compound interest, your future self will definitely thank you.
Even if you were to save just $500 a month, doing this consistently over a 40-year career would leave you with a nest egg worth over $1.5 million (that's with just an 8% annual return). I recommend everyone cut expenses to they can invest a little every month.
4. Stick to your budget and stay consistent.
Ultimately, your budget is a plan to get your finances in shape. Using one can help you reduce or stay out of debt as well as invest and save as much as you can.
Your budget is useless if you don't use it, so stay consistent and don't let yourself slack off.
Remember that $500 investment you planned to make in your budget? In 40 years at an 8% rate of return, it will be worth $10,862.
I hope I've convinced you to create a budget. I think it's a fun way to work towards financial goals, and I get excited when I'm able to cut spending and save and invest a little more money.
Let me know if you found this useful or helpful. My goal is to help as many people as I can take control of and reach their financial goals.