A budget is a tool for managing your income, expenses and other financial goals like savings and debt payments. Budgets usually cover a set period of time, such as a month or year.
When it comes to budgeting, there’s no single “right way.” What works for one person might not work for another for a variety of reasons, such as family size, geographic location or financial priorities. The key to budgeting is finding a method that fits your style and sticking to it.
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Figure out your take-home pay (income after taxes and deductions like healthcare premiums and retirement savings).
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Track your expenses for a month. Keep track of everything you buy and categorize it into needs, wants and savings/debt.
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Choose a budgeting method. There are tons of great options, but the 50/30/20 is one place to start.
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Compare your spending with your method’s suggested categories. If your “wants” exceed 30% of your budget, for example, then shift money and priorities to meet your goals next month.
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Review your budget regularly. Taking a look at your spending and seeing how it’s stacking up to your budgeting categories weekly can help you correct your behavior if you’re not meeting your goals. Monthly reviews help you see what’s working and what’s not and make changes for the next month.
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50% for needs: things you must pay for, necessities, such as housing, transportation, utilities, loan payments and groceries.;
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30% for wants: things you choose to spend money on,, including travel, entertainment and dining out.
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20% for savings and debt paydown: money set aside for emergency funds, retirement and paying off extra debt paying off debt beyond the minimum payments.
Why is budgeting important?
Budgeting encourages you to put your money to work in the best way possible and can help you identify overspending. Think of a budget as a next step toward reaching your financial goals. It can help you:
See where your money is going
For example, maybe your budget shows that you spend less than you earn, but you’re paying for subscriptions or services you no longer need. Cutting those “wants” can free up money so you can more easily meet monthly needs.
Plan for upcoming expenses
Treating your savings goals like bills within your budget can make larger goals more reachable. Savings buckets, or sinking funds can help you manage your savings. For example, you could put $100 into a vacation fund, $50 into a holiday gift fund and $250 into an emergency fund.
“Start small and start now,” Dasha Kennedy, author and financial influencer, said in an interview. “I don’t care if it’s $10 a week. Consistency matters more than the amount.”
Setting aside money regularly can help you build a financial cushion. That way, when unexpected expenses come up, you may be able to cover them without relying as much on credit cards. Over time, this can help you limit or avoid high-interest debt.
Budgeting can help you feel more prepared for the challenges life brings. Knowing exactly where your money is going can bring a sense of relief. Having a clear picture of your finances can help reduce the stress of uncertainty, and make it easier to plan.
A good budget can help you get through seasons where spending is higher — like around the holidays or during the summer, when travel is at a premium — with smart planning and preparation.
You might feel better and more secure knowing you are building a financial safety net and are actively saving for your goals and dreams. A budget is there to make you feel empowered and in charge of your money and your life.
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