A budget is a way to plan how you will spend your money. It helps you achieve short and long term goals, like paying off debt or saving for retirement. It is also a tool for making good financial decisions, such as cutting back on coffee shop lattes and restaurant meals or buying a more economical car.
The first step in creating a personal budget is to carefully calculate your expenses. Gather all of your monthly bills and receipts, paycheck stubs and investment account statements. It’s also helpful to review three months of credit card and debit card transactions to get an accurate picture of your spending.
Once you have your total expenses, compare them to your income. If your expenses are greater than your income, you need to find ways to reduce costs or increase your income. This may mean cutting back on discretionary items, like dinners out or lowering your cell phone plan, or changing habits that cost more than necessary, like skipping trips to the gym or letting food spoil before eating it.
The next step is to prioritize your expenses by separating them into needs and wants. Needs include things like housing, utilities, food and transportation. Wants include entertainment, gifts and leisure activities. It’s important to decide which categories are most important to you and your family. A popular budgeting strategy is the 50/20/30 rule, which recommends that 50% of your net income should go toward your needs and 20% should be saved or put toward debt repayment. The remaining 30% can be spent on your wants.
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