Excited to get your money to start working for you instead of someone else? Great! Before you get ahead of yourself, back up and check out this quick introduction on how to make a budget. Here we'll offer some basic definitions and advice with links to dig deeper when you're ready. Whether you've never seen a budget or it's been a while and you need a refresher, this straight-talk intro is for you.
Let's jump in.
Tool Up
Simply put, a budget is a plan for spending. Instead of wondering what happened at the end of each month, you know exactly why things panned out the way they did. Whether you end up ahead or behind, you're aware of what happened, and how you ended up where you are.
To get there, you'll need a few simple tools, starting with a budget worksheet. Using a budget worksheet is a great resource to start tracking your spending. It can be as simple a sheet of paper or as involved as budgeting software for your computer. The purpose is simply to look and acknowledge where your money usually goes.
It's often easy to forget expenditures such as money for car maintenance or doctor co-pays...having a good worksheet will help remind you of those little (or not so little!) things. Once you determine your monthly expenses, you can see how it matches up with your monthly take home income. The hard part is deciding where you may need to make some adjustments (adios, cable!), and when you'll have extra wiggle room. The Federal Trade Commission offers a great starter worksheet that will get your mental budgeting juices flowing.
How to Make a Budget
Once you've chosen a method for tracking your spending, it's time to plan next month's income and expenditures.
Basic budgeting will take a bit of number crunching. When you start to establish how to make a budget it's important to have a good understanding of what healthy spending actually is.
Not sure where to start? Consider the most basic of all budgeting concepts, the 50/30/20 rule, as a guideline.
Having a general rule of thumb is a great jumping off point. Whether you're a millionaire with money to blow or a college student surviving on noodles – the 50/30/20 principle should be part of your vocabulary. It's a tried and true concept that's easy to remember. Here's how it works.
Your goal is to keep your "essentials" at around 50% of your take home pay. For example, if your monthly income is $3000 and your combined house and car payment is $2500 – you've got some cutting back to do. The 30% category is classified as your "wants." This category is, of course, more fluid but is most often where people find themselves in hot water. And finally, the last category is the 20% "savings" category. This can be socking money away for college or paying off credit card debt or even a rainy day fund. It can be tempting to skip this last category but you'll be glad you did it when the furnace breaks in January!
For a more in-depth discussion of the 50/30/20 rule, check out "Feed the Pig," a cheeky blog post from the nonprofit American Institute of CPAs. Or, pick up the phone and call your helpful friends at your local Credit Union. We're always here to help.
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