Today, more and more, people seem to struggle with balancing their income and spending, simply because they do not know how to budget. In the United States, as well as other parts of the world, everyday working-class citizens find it harder and harder to cover basic needs and save money. This trend as of late has occurred for a variety of reasons - from lack of adequate job training, a stagnated minimum wage, and most notably, the economic crisis of 2008 which affected many world economies.
According to a report from CareerBuilder taken last year, approximately 78% of full-time workers say they live "paycheck-to-paycheck." It's not just living week to week which is the problem, many Americans are also battling to manage their debt. Debts from college loans and credit cards are also becoming more rampant than ever. While many financial experts recommend everyone should have a safety net of savings that could sustain your living expenses for at least six months; for those who lack the knowledge of how to budget, this is basically impossible.
Your ability to manage money effects not only your general economic mobility, but it can also profoundly influence your mental well-being, as well as a range of other issues. In order to organize both your life and your money, budgeting is key to helping you maintain a healthy balance of what you can afford to spend on - pleasure items and activities vs. necessities. Budgeting helps you realize exactly how to manage your money in a way that is completely customizable to your lifestyle and long-term financial goals.
What Is Budgeting?
Budgeting is more than just figuring out what you spend on a daily, monthly, or yearly basis. Learning how to budget is also about learning what adds value to your life and what is unnecessary spending. Without a proper budget, it is easy to lose track of your spending. Not keeping track of your spending can lead to overspending, and in the worst-case scenario, debt.
Creating an effective budget not only helps you manage your money in the most efficient way possible, but it also reduces stress and provides other benefits to your life outside the financial realm. Benefits of creating a budget to fit your lifestyle and financial goals include:
Budgeting should be as common as any other routine you set in your life to make you more productive and it can be done within the matter of a few minutes. The best type of budget system to create is one that incorporates how much money is needed for daily living expenses and how much should be set aside for regular savings.
Why Is Budgeting Important?
To gain control of your life, you must be in control of your finances. So many people have to live with the burden of credit card debt and loans that they are often caught in a vicious cycle that prevents them from living a stress-free life. Without a proper budget, things can quickly take a turn for the worse, and before you even know it, your expenses slowly overcome your earnings, thus creating financial strife.
Creating a budget also helps you organize all of your expenses in a concrete, realistic way. Most people have a rough idea of what their weekly or monthly budgets are; however, without a set plan, it is easy to forget the little things that add up - such as gas, water, and subscription services. Although it may not seem like much, these small expenditures can be the difference between financial freedom and struggle.
One of the most important reasons to learn how to budget is to get your priorities in order. Some priorities that you can begin with include these top three starting points:
No one likes to think about the worse situation happening, and because of that, many don't have an emergency fund plan. Experts suggest that an appropriate "rainy day fund," should consist of approximately three months' worth of bare living expenses. For those just beginning to get into budgeting, a good starting point that you can aim for in your emergency fund is around $500. It is important to make sure that this fund is only ever used for emergencies or unexpected expenditures such as car issues, doctor visits, and the like.
Another priority you should have when learning how to budget is minimizing your debt as quickly as possible - especially toxic debt. Toxic debt is debt that has particularly high interest rates such as personal credit cards, payday loans, title loans, or any other type of payment structures like rent-to-own. While it may be easy to make low payments, this type of debt carries high interest rates. In the long run, you can end up paying anywhere from two to three times the original amount you borrowed. Make paying off these types of debt your first priority over other forms of debt.
Starting a 401(k)
After setting aside $500 for your emergency fund and figuring out which toxic debts to prioritize first, getting a great 401(k) is one of the best things you can do to help kickstart your new budgeting lifestyle. A 401k allows you to defer a percentage of your pay to be placed into your 401k plan. These contributions are taken away from your salary pre-tax. So, in the long run, you will actually lower the overall amount you pay in income taxes. Plus, many employers will often match an employee's 401k, making it essentially, free money!
How To Budget Your Income
If you have never created one before, learning how to create a budget can seem a little daunting. Luckily, we have prepared this expert step-by-step guide to help you with everything you need to know about how to budget your income.
Step 1: Calculate Income
One of the most important factors when it comes to learning how to budget is assessing your income, and take-home income should be your focus. It is best to not use your pre-tax income because that will over-inflate your expenses and you will end up having to pay more than you expected. In order to first calculate your income, you must determine how you receive your income. There are roughly three ways people are paid, these are the following:
If you are paid bi-weekly, to discover your monthly income you must multiply your paycheck by 26, and then divide by 12. For those of you who are paid weekly, multiply your paycheck by 52 and then divide by 12 in order to get your monthly income. If your income fluctuates more often, for example, if you work based off tips or do predominantly freelance work, determining your monthly income can be more difficult. The best thing to do if your monthly income fluctuates is to calculate your average income over three months and divide that by three.
Step 2: Assess Monthly Expenses
It can be hard to remember exactly what all of your monthly expenses are, so make sure to sit down and either write them out on a piece of paper or on an online spreadsheet. To help this process along and make sure you don't forget anything crucial, gather as much financial information as you can such as bank statements, recipes, or any other source of information that details your expenses. Common expenses that you can start with are the following:
Step 3: Fixed vs. Variable
Once you have discovered and written out all of your monthly expenses, the next step is to categorize these expenses into either "fixed expenses" or "variable expenses." Fixed expenses are those that will remain relatively constant from month to month. For example, some fixed expenses include items such as rent or car payments. Variable expenses are those that will fluctuate from each month; these expenses include things such as groceries, gas, or entertainment.
Step 4: Compare
After going through the previous steps, it is finally time to compare how your take-home income stands up against your total expenses, including both fixed and variable. Your budgeting goal should always have at least 20% of your income set aside to be put into savings. The best way to achieve consistent savings is to make adjustments to your variable expenses and only focus on the most crucial necessities.
Learning how to budget appropriately, and be consistent with it, can end up saving you time and unnecessary stress in the long run, as well as give you a new sense of financial freedom. Budgeting is just one out of many ways that you can become more financially literate. Check out personalfinancehub.net for more great tips and information on how you can gain control of your finances today!