Wednesday, April 12, 2017

How To Create A Budget In 5 Steps

How To Create A Budget In 5 Steps

As part of my Ultimate Guide to Spring Cleaning, one of the items that I mentioned was to get control of your finances and develop a plan to keep your spending in check.  Here are the steps that you can take to help you hit your financial goals and pay off your debt.

Even though budgeting is tough for people to stick to, it's a simple mathematical equation to balance your money that comes in and your money that goes out.

1.  What Is Your Monthly Income?  Add up your monthly paychecks to establish your monthly income after taxes, 401k, medical, and any other deductions that are taken out.  If you are self-employed or get paid on commission, take an average of the past 4-6 months to have a realistic estimate of your income.

2.  What Are Your Fixed Expenses? Your fixed expenses are those items that you have to pay every month such as your mortgage/rent, utilities, student loan payments, car payments/transportation, etc.

3.  What Are Your Variable Expenses?  Your variable expenses are items that change from month to month.  These expenses include money spent on groceries, clothes shopping, going out to eat, hair appointments, etc.

4.  What's Left Over?  After paying all of your expenses (both fixed and variable), the money left over is known as your discretionary income.  This money should be used for investing, saving, or paying off your debt.  The goal is to minimize your expenses in order to maximize your discretionary income.

5.  Evaluate Your Budget.  Calculate what percentage of your budget is going towards your fixed expenses, variable expenses, and discretionary income.  A popular rule of thumb is the 50/30/20 rule meaning that 50% of your income should go towards your fixed expenses, 30% towards your variable expenses, and 20% should go towards paying off your debt and deposited into savings.  This may vary depending on where you live, but it's a good ratio to use as a guide.

There are a lot of great personal finance apps out there that can help you stick to your budget such as Level, Mint and my favorite, LearnVest.  The key to all of these apps is linking your bank accounts and credit cards to the app.  The first time you log into the app or the website, it helps you setup your budget by asking what your income and expenses are.  Going forward, the app will know what category all of your money should go into since the app has access to your accounts.  This helps you figure out how you are pacing each month to ensure that you are staying within your monthly budget.  You can also adjust your budget based on your priorities.  On these apps, enter in your goals and it will help you develop a strategy to pay off your debt and hit your savings goals. You will receive weekly and/or monthly updates via email to show where all of your money went and how you are pacing.  They even offer suggestions on ways to save money!  I like to check into the app once a week to see how I'm pacing so I don't have any surprises at the end of the month.

Have you tried any of these apps?  Which are your favorite?  How have they helped you?  Let me know in the comments!

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