March 29, 2020

Why Is A Budget Important And How To Create One?

The first thing people bring up when it comes to finances is the idea to create a budget. But you may be wondering… How do I do this exactly? And why is a budget important?

What is a Budget?

A budget is a spending plan based on your income and expenses over a period of time. It is simply a way to keep track of the money coming in and where it is going to. Budgeting and creating a plan for your money allows you to control how it is being spent.

Why is a Budget Important?

When keeping track of your income and expenses with a budget, it ensures that you don’t overspend money you don’t have and go into debt. It can help you identify the areas that you’re spending too much and allow you to fix them. When following a budget, you can focus your spending on what is important you you. You can also see the importance of having a budget when it comes to saving money and paying off debt. Here is a breakdown of the many advantages of budgeting:

Advantages of Budgeting

  • Allows you to have control over your finances and feel less stress.
  • Helps you keep track of your spending in order to reach your saving goals.
  • Ensures you don’t spend money you do not have.
  • Helps you avoid having to pay bills late and the extra fees that come along with it.
  • Highlights your bad habits and the areas that you are overspending in.
  • Allows you to save and prepare for unfortunate events by having an emergency savings.
  • Enables you to avoid going into debt.

How to Create a Budget

Creating a budget can be very simple. The first budget I ever made was done in the notes app on my phone! This simple budget is a great introduction into a life of frugality for those starting out.

How much should you save monthly?

In my budget I wrote down my income after taxes and immediately took out 20% of my income to set aside as savings. (I loosely follow the 50/30/20 budget rule.) However, if you can only save $50 dollars per month, it’s still a great start. Slow and steady wins the race!

Calculate Monthly Spending

The first step to creating a budget is to track how much money you spend on a regular basis. There are different ways you can see where your money is going. You can check your bank statement, use an app like Mint, keep track of all your receipts over a month, or, in my case, do all three!

If you’re surprised by this amount, follow these ways to lower your monthly spending.

Needs

Separate your needs and make a list of them. Needs are the things that you require to survive. When deciding, think… “Can I live without this?” For me, they included things like rent, utilities, insurance, internet, a car, etc. However, some wants can seem like they are needed. For instance, you might want more space in your home than is actually necessary. Or, while you do need clothes, you don’t need to buy new ones every month.

You can always find ways to lower these bills: Find better deals at cellphone companies, shop around for a cheaper car insurance, skip out on that brand new car and find a used one, etc.

With the total amount of my needs calculated, I subtracted that from my income after taking out savings. The money leftover from this, is what I then used to figure out which “wants” I could afford.

Wants

Wants are things that you desire, but don’t require. This includes groceries, getting hair cuts, entertainment, etc.

Some things don’t fit easily into a category. While food is necessary for survival, the specifics of what I buy and the amount I spend on it is easy to adjust. I do need food and water, but I don’t have to buy expensive cuts of meat or gallons of juice.

Though they all have set amounts, they are things that I could skip or change the amount the I paid for it. For example, If I somehow spent too much money for the month, I can skip out on my entertainment budget and not go out. Or instead of buying expensive steaks for dinner all week, I could have lower cost meals like maybe spaghetti.

I also always put a miscellaneous amount for any random costs.

Prioritize what is important to you.

And ta-da! That is my simple budget. 

Monthly Income:
$3,500

Savings
20% of Income
Total= $700
$3,500 – $700 = $2,800 for Needs

Needs
$1200 Rent
$100 Utilities
$100 Cellphone
$150 Car + Apartment Insurance
$300 Car Payment
Total= $1850
$2800 – $1850 = $950 for Wants

Wants
$300 Groceries
$160 Gas (Car)
$40 Internet
$80 Hair
$40 Internet Tv
$200 Misc Items (household, personal, etc)
$80 Entertainment
Total= $900
$950 – $900 = $50 leftover

(More to save! It is good to
keep this for another rainy day or emergency savings.
Such as if your car breaks down, AC unit conks out,
and those yearly fees such as car registration. I
like to put extra money aside for vacations as well.)

Stick to it! Budgeting Methods:

There are various methods to help you stay on track with our budget. Whatever method you chose, find something that works for you.

Create Separate Bank Accounts

One way that helped me stick to this budget is to have two separate bank accounts. After every payday, I transferred the amount for my bills and savings into my second bank account. This ensured that I always had enough to pay my bills and would not “accidentally” spend it. I set up all my bills on auto-pay so they’d be paid on time.

I also have some bills on my credit card and set it to be fully paid off each month. This helped me achieve a high credit score!

Envelope system with cash

The envelope budgeting method is great for those who need to visually keep track of their expenses. You do this by withdrawing cash, and adding the predetermined amount into separate envelopes for each category. Once the money in the envelope is gone, that’s it for the month!

You might also find that it works best for you to combine these methods. For bills, you can separate that money into another account and pay them electronically. Then for everyday spending, categorize those amounts into envelopes and pay with cash.

Pin: Simple Budget from phone. Hands using phone in background

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