Life is full of unexpected expenses, bills, and other financial obligations that can be overwhelming. Maintaining a healthy financial situation can be difficult if you're not careful. As such, budgeting is one of the most important tools for improving your financial situation.
Whether you're trying to get out of debt, save for a big expense like a house or car, or ensure that you have enough money to cover your monthly payments, budgeting is key. This guide will provide you with important tips, helpful advice, and essential steps on how to budget effectively.
Why is budgeting important?
Before we get into budgeting, it's important to understand why it is essential. The problem with a budget is that many people don’t believe it's worth their time, especially when they're already in a decent financial position. Regardless of your financial situation, budgeting is well worth the effort. So, if you're ready to take control of your finances and to start budgeting effectively, keep the following vital budgeting tips in mind:
It allows you to see exactly where your money is going and can help you identify areas where you may be overspending or wasting money.
A well-crafted budget lets you be in control of your finances and can help you achieve your financial goals.
By staying on top of your budget, it's easier to maintain healthy financial habits and avoid costly mistakes in the future.
What are some steps I can take?
Let's look at some key steps to help you get started, especially now that you understand the importance of budgeting.
1. Calculate your net income
The basis of any adequate budget is understanding your income. After all, you can't create a budget without knowing how much money you have to work with.
To calculate your net income, look at the total amount of money you make each month from all sources. As a firefighter, this will include your salary, with additional cash like overtime or severance pay. But you should also factor in any other income that you receive. For instance, some people have rental income or a “side gig” that brings in extra cash each month.
Add the sum of all these income sources to get your net income. This is the amount you will work with each month for your budget. If your income seems to vary significantly from month to month, it's usually a good idea to average your income over a year and use that figure in your budget.
2. Track your spending/calculate your expenses
Once you know your net income, the next step is to track your spending and calculate your expenses. You can do this in several ways, such as using an app or spreadsheet. If you want to be precise, consider tracking every single purchase you make for a few weeks.
The traditional way to do this was to keep all your receipts and add them up at the end of the month. If you pay cash for many of your purchases, it is still a good idea to use this method. However, if you use a credit or debit card for most purchases, it's much easier to track your spending using an app. Most online banking platforms even have built-in tools for tracking your purchases.
Remember that there are two types of expenses that you need to account for: fixed and variable. The former includes things like rent or mortgage payments, car payments, and insurance premiums. You can determine what other costs to include by looking at your past bank statements or simply by keeping a list of your fixed expenses. Next, it is important to include variable expenses in your budget. You can usually change or cut back on these costs, such as dining out, entertainment, and clothing. Generally speaking, everything that doesn't fall into the fixed expenses category is a variable expense. Note that you may have one-off costs that you will need to add in as well, such as holiday gifts or travel expenses.
Calculating expenses is often the most challenging and time-consuming part of the budgeting process. But once you have your numbers, creating a realistic and practical budget becomes much more manageable.
3. Set realistic goals
You now have all the information necessary to create a budget. A quick subtraction of total expenses from your total income will give you a figure representing the amount of money you have left over each month. Don't get discouraged if your budget reveals that you are spending more than you earn each month — it's relatively common and not an insurmountable problem.
To make the most of your budget, it’s a good idea to set some realistic money goals. The 50/30/20 rule is one popular framework for doing so. Under the 50/30/20 rule, you should allocate at least 50% of your income to "needs" or fixed expenses, such as rent and utility bills. At least 30% of your income should go to "wants" like shopping, entertainment, and dining out. The remaining 20% is reserved for savings or "found money" that you can use when you need it.
It's crucial to be realistic with your goals, however. It may not be possible to achieve a 50/30/20 split right away, and that's okay. Start by setting more achievable goals, such as saving 5-10% of your income or reducing your monthly expenses by a few hundred dollars. As you become more confident with budgeting, you can adjust your goals accordingly to match your progress.
4. Make a plan
Finally, once you have your numbers in place, it's time to create a plan for managing your money. If you have trouble sticking to a budget, consider creating a monthly or weekly spending plan that outlines how much you can spend on various items at particular times. Similarly, check your budget regularly and revise it as necessary.
Identifying small wins is one way to keep motivated and stay on track with your budget. For instance, if you are having trouble saving money each month, start by creating a goal to save just $20 each week. By doing this, you create a positive habit that will help you meet your financial goals over time.
Milestones like paying off a credit card, car loan, or student loan are also great motivators. If you have a goal to pay off one of these loans within the next year, it will give you something to work toward each month and help keep you focused on your budgeting goals.
Ultimately, your plan for managing your money will depend on your circumstances. But by following these basic steps, you can create a budget that works for you and helps you reach your financial goals.
Budgeting isn't something you do once and then forget about. It's a continual process that requires regular monitoring and tweaking over time. Failing to do so can lead to overspending, debt, or other financial difficulties.
