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Start by articulating what’s driving you to create a budget. This will help keep you motivated and on track when you hit roadblocks.
1. Prioritize your expenses.
First, consider your fixed expenses – those bills and monthly costs that don’t change month to month. These can include things like your mortgage or rent, car payment, utilities and day care. These are the items that are essential to keeping a roof over your head, so it’s important to pay them before anything else. Having investment in a home warranty can help alleviate stress of expenses such as home appliance repairs. If you are wondering what does a home warranty cover, then you should familiarize yourself with it to budget accordingly. Some homeowners save hassle and time worrying about repair costs because their home appliances are covered under a home warranty. For more information on it, go online and search for these services.
Then, consider your variable expenses – those items that can change from month to month like groceries, clothing and entertainment. These are the items you can probably cut back on without much consequence if needed. Just be sure to track these so you can see where your money is going each month.
2. Set a budget.
When you set a budget, you should include both important regular expenses and occasional ones like dining out and movie tickets. You can use a budgeting app or simply save receipts and add up expenses by hand to calculate your monthly spending.
Write down your NET income (that’s what you take home after payroll deductions for taxes, health insurance and 401(k) contributions). This is the number that will guide your budget.
Next, subtract your total spending from your NET income to see whether you’re overspending or saving enough. If you are, make adjustments so that your budget lines up with your actual spending.
3. Track your spending.
Often, the motivation to stick to a budget comes from the fact that you’re invested in it. For example, if you’re saving for something long-term, like a vacation or your kids’ college education, you’ll want to keep track of how much you spend on nonessential indulgences so you can reach those goals faster.
Start by listing your fixed expenses (like rent or a mortgage, utilities and cell phone bills), then estimate your variable spending—everything else from groceries to clothes to entertainment. Reviewing past credit card and bank statements can help you accurately estimate these costs. Also consider setting up automatic payments for your recurring bills to avoid late fees.
4. Set aside money for emergencies.
Emergency savings can help you avoid relying on credit cards or loans that could result in financial hardship. It’s recommended to have between three and six months of expenses saved up for emergencies.
Set aside a fixed amount each month from your paycheck and place it into an account that’s easy to access without penalties or taxes. You can also set up automatic transfers to save automatically from each pay check.
Saving money can be difficult, especially when life gets in the way. But remember that budgeting isn’t all about penny-pinching and that you can still make room for fun stuff, too! Try buying generic brands, meal planning, and skipping the extras like Netflix subscriptions and ice cream runs.
5. Set aside money for savings.
Whether you are a freelancer with variable income or have a steady paycheck, it’s important to build a savings habit. This will help you stay away from credit cards and make sure your emergency fund is enough to cover unexpected expenses.
It’s also important to update your budget after a major life event, such as a change in your income. This will give you a better idea of how much money you should be saving. Most experts recommend putting aside three to six months worth of expenses in your emergency savings. If you can, try to save even more than that.
6. Set aside money for retirement.
It can be easy to spend more than you earn, especially when it comes to eating out and other discretionary purchases. But if you can trim those expenses and funnel some of that money toward your retirement plan, you could see your nest egg grow by leaps and bounds over time.
Many people find themselves living paycheck to paycheck and lacking an emergency savings cushion. That’s why experts suggest setting aside up to six months of your living expenses. This can help you cover unexpected costs, like a broken car or leaky roof, without dipping into your retirement savings.