Have you ever felt like you consistently spend more than you earn in income each month? If so, a budget is a great solution. By creating a plan for your money and allocating spending limits, you can start having more control over where your income goes and how much of it you allow yourself to spend. Coming up with a plan is not always easy though, and that’s why RMLEFCU is here to show you how to create a budget, no matter what your income is.
Step 1: Determine Income
Determining income may be easier for some people than others. If you are on a salaried pay scale or get consistently similar paychecks, you can easily calculate your monthly income. For those who work hourly jobs where income is unpredictable or sporadic, this may be a bit more difficult. In this case, it is best to determine your average monthly income by calculating the average of the last 6 to 12 months of recurring income. This will give you the best estimate of what you earn, on average, per month and allow you to budget accordingly.
Step 2: Establish Wants vs. Needs
Establishing the difference between expenses that are a want and a need is a very important step. In total, these expenses should add up to about 80% of your monthly paycheck – 50% going toward essential costs, and 30% to “fun” costs.
A needed expense usually falls into one of four main categories: housing, utilities, groceries, and transportation. If you find yourself spending more that 50% of your monthly income here, then it might be time to scale back in one or more of the categories. For example, not buying all organic produce from Whole Foods every week, or trading in your luxury apartment for something a bit more affordable.
The “wants”, or fun expenses, include everything from eating out to buying concert tickets. These are the costs that can be easily reduced if you feel you’re cutting it too close to going over your budget near the end of the month and can ultimately help you realize what you truly can and cannot afford. For example, if you go completely over the allocated 30% of your income one month and realize you saw 4 movies in the theaters, that might be a good place to look at cutting costs for the future.
Step 3: Save Some Money
While it might be tempting to spend all of your excess money on entertainment, that is not how you set yourself up for future success. If you’re not sure how much you should be saving, a general rule of thumb is to allocate 20% of your monthly income to savings. This will give you an extra financial cushion should an emergency occur, or simply be a place for you to stash your money away for a much needed vacation. We know it can be difficult to transfer funds from your checking directly to a savings account, so to make it easier, we offer an automatic transfer system that will automatically deduct a certain amount from your direct paycheck deposits and put it right into your savings account. If you don’t see the money in the first place, you won’t even miss it!
Step 4: Make Adjustments and Track Your Progress
After tracking your spending for a few months, you’ll be able to easily see how much of your money goes where. If any areas seem to be off, it might be time to reevaluate your spending and see if you can cut some costs in order to save more. Priorities, income, and expenses will all change over time, and budgets have the flexibility to accommodate any and all of these changes. It is ultimately up to you to determine what you think you can reasonably afford and what is out of your means for the time being.
In the beginning, making a budget might seem like a difficult task, but in the end, it will not only make you more aware of your spending habits, but also help you understand the importance of saving. You can’t use the “not knowing how to create a budget” excuse anymore, so what are you waiting for? Visit our website and get started with a savings account today and utilize our online banking budgeting tool.