Budget is a word that often strikes fear in those looking to balance their financials. But it doesn’t need to be scary or intimidating if you keep your eye on the prize.
Getting started isn’t too hard, and it can help you pay your bills on time, pay off debt and save for the future. That doesn’t sound so bad, right?
What Is a Budget?
A budget is simply an estimate of your income and expenses for a set period of time. The length of time is up to you and you can adjust it according to your goals. For example, you could have a monthly, yearly and retirement budget — and still another one to save for a vacation.
[Read: How to Create a Financial Plan Like a Pro]
The Purpose of a Budget
The purpose of a budget is to gain greater control over your financial situation. Budgeting shines a light on how much money you have and where it needs to go. As a result, it can help you to pay off and prevent debt, feel less stressed, save money and prioritize important expenses.
How to Create a Budget
When you’re ready to create a budget, follow these four main steps:
— Calculate your income. Take inventory of all the income coming into your household. This includes earnings from full-time jobs, side hustles, government support or other financial support you may receive. If you’re married or living with a partner you want to include in your budget, add their income in as well.
— Determine your expenses. Write down all of your expenses from clothing and rent to food and entertainment. Having a full understanding of your financial responsibilities will enable you to see the amount of money you have left over for other items.
— Set your priorities. Prioritize your spending. Separate your wants from your needs and rank your expenses from most to least important. Is there anything you can or should eliminate so you can redirect the funds elsewhere? Here’s where you can make adjustments to reach your goals as quickly as possible.
— Establish your timeline. Determine how much time you want and need to give yourself for each budgeting goal. For example, you may have a vacation as a short-term goal, a down payment on a house as a medium-term goal and retirement as a long-term goal. Figure out how much you can save per month for each goal, then set a target date for achieving the final budget goal.
[SEE: 10 Best Budget Apps.]
How to Stick to a Budget
Now that you’ve set your budget, it’s time for the hard part — sticking to it. Here are some tips that can help:
— Lose the credit card. If you’re trying to keep your credit card balances down, take the cards out of your wallet to help prevent impulse purchases.
— Keep it honest. Be real with yourself. If you break your budget, note it, then readjust for that week or the month.
— Meal plan. Meal prepping can help you and your family stay on budget because you’ll be less likely to eat or order out.
— Learn to say no. There will be things you want to do like visiting an amusement park, going to brunch or buying a new car, but there are times when it’s best to practice self-discipline and just say no.
— Set up auto-draft. Set your most important bills to auto-draft from your bank account so you can ensure they get paid on time.
— Track your spending. Track everything you spend. Staying aware is key. Consider using a budgeting app.
— Avoid unnecessary splurges. Try not to splurge on items you don’t need, like a daily Starbucks coffee. Even saving that $5 a day adds up to $1,825 in a year.
[READ: What Is ‘Lifestyle Creep’ and Should You Try to Avoid It?]
Popular Budgeting Strategies
Not sure where to start? Here are three popular budgeting methods:
— Zero-based budget. This strategy is one in which you assign every income dollar to a specific budgeting category, like rent or groceries. If you don’t use those dollars, you can roll them over into new categories.
— 50/30/20 budget. This technique is one of the most popular. The general rule of thumb is that 50% of your income goes toward essentials (rent, food, bills), 30% toward personal wants (travel, dining out) and 20% toward savings.
— Envelope budget. Envelope budgeting is an old-school way of sticking to a budget. You set a budget for each category of spending — like groceries and rent — and put the assigned amount into a separate envelope for each. Once that money is gone, you’re finished spending on that for the month. Try using virtual envelopes so you can follow this method digitally.
With proper planning and execution, budgets can get you on track or help you stick to your saving and spending goals. Remember to always leave a little wiggle room in case emergency expenses pop up, like auto repairs, medical bills or whatever else life throws your way.
More from U.S. News
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Tips for Living Frugally Without Looking Cheap
What Is a Budget? originally appeared on usnews.com
Update 04/14/23: This story was published at an earlier date and has been updated with new information.
