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Do you wonder where your money goes every month? You’re not alone. One study shows that 78% of American workers live paycheck to paycheck and barely make ends meet. When expenses like needing to repair or replace an automobile come up, if you among that 78%, you can find yourself in a difficult place financially. That’s where knowing how to budget and having a budget in place makes life easier.
When you budget for expenses and have some savings to cover those expenses, you’re prepared to replace your old car with a newer, safer model or fix the one you have.
A budget is a system you use to ensure you aren’t spending more than you’re earning and that you’re spending your money on the right things. The word “budget” is scary for some, so you may want to call it “financial management” instead. Whatever term you use, the goal is the same—managing your money to achieve your financial goals.
Think of a budget similarly to how you think of your car maintenance schedule. It’s not there to make your life harder but to make it easier and more automatic to keep your care in working condition. A budget is your financial maintenance system that makes spending within your means and saving for future expenses easier and more automatic.
To start, it’s important to set some budget goals. First, ask yourself what you want to achieve with your budget. What do you want to do? Your answers might include:
Buying a new car, buying a home, paying off debt and building up savings are among the things that motivate people to start budgeting most. And having a goal makes it easier to stick to your spending plan.
Starting a budget is as simple as completing four steps.
Once you have your income and expenses information, you can see where you spend your money. With that, you can use your budget reign in overspending, pay down debt and put some of the money you have left in savings. You may also find ways you’re wasting money and can adjust expenses to come out ahead financially.
Discretionary funds are made up of the money you have left after you’ve paid for all your living expenses. Hopefully, that’s a positive number. If it’s negative, your expenses are more than your income. And you might consider these options for reducing monthly expenses to more manageable levels:
The key to how to budget successfully is to accurately track your income and spending and eliminate debt. For a budget to work, you need to make it a priority, but not a burden. Keep your eyes on your savings goals and avoid common budgeting mistakes like neglecting to plan for emergencies. To deep dive into budgeting, see “How to Create a Comprehensive Budget.”
As you master using your budget, keep your eyes on these critical goals of budgeting:
Putting less money in your emergency fund in order to make larger payments on debts is saving money. Once you’ve reduced your debt to a manageable level or paid it off, that money can go into your emergency fund. You can use these tips for building your emergency fund when money is tight. And remember, once you have that emergency fund in place, you can start saving for a dream vacation, a new car, a house or whatever it is you aspire to.
Most people think of budgets as detailed lists of every purchase broken down into endless categories. The truth is budgeting is a lot like hiking. Some people like to follow a marked path and others prefer the less guided, off trail experience.
Part of mastering how to budget is understanding that not every budget works for every person. The traditional line-item budget and the 50/30/20 budget work well for the first-time and other budgeters. Let’s take a closer look at both.
A line item budget is the type of budget most people are familiar with. It’s a comprehensive budgeting plan that lets you track your income and set spending goals for every expense category. Here’s how to budget using this method:
One your line item budget is complete, you can use it to track your spending against your income moving forward and adjust spending as needed.
A traditional line-item budget is a good option for those who have a specific savings goal, like purchasing a new car, because it shows exactly where you can trim funds and where you can’t. For example, it’s okay to take money away from entertainment but not from loan payments, insurance or housing.
Make creating a line item budget easier with a free Google Doc monthly budget template or a budgeting app, such as Intuit Mint. You can also use our free budget template.
The 50/30/20 budget rule is a percentage budget that provides more freedom in spending. Learning how to budget this way is simple. You divide you after-tax income into three areas:
Needs are things you must pay for like food, rent, mortgages, utilities and health care costs.
Wants are things you can do without like movies, concerts, the latest electronic devices and dining out.
Savings includes money deposited in an emergency fund and debt repayment in the form of extra payments toward principal. The principal is the actual amount you pay for an item—the original loan amount—and doesn’t include loan interest. Paying extra towards principal can help you pay off loans sooner.
Using a 50/30/20 budget, an income of $2,000 a month would put $1,000 towards needs, $600 toward wants, and $400 towards savings. You can alter the percentages to fit your financial goals, too. You may think $600 for wants seems a bit much, so you adjust your budget to 50/20/30 and put $600 in savings and leave $400 for wants. If your expenses are more than $1,000 each month, switch to a 60/10/30 ratio.
Some people find the percentage method easier and less stressful than tracking every single individual expense. Whatever you choose, the goal of learning how to budget is to create a spending plan that fits your individual financial needs and long-term goals.
Tools and technology make creating a budget even easier. From computer software to cell phone apps, there’s no shortage of budgeting apps and tools to help you find a budgeting strategy that works for you.
Mint and Clarity Money are a few of the favorite tools used by the Credit.com team. Give them all a look and see which one fits your financial goals best.
Learning how to budget and mastering using a budget is easier than you think, just remember these key points when creating your budget:
Mastering your budget makes it possible to save money. And with effective financial management, you can save enough money for a down payment on a new car, and with an auto loan, replace that old car or truck.
The maximize your emergency fund or your savings for that new car, open a savings account that pays interest on the money you have in the account. Many accounts let you open the account with no minimum deposit, so you can open it today and have it ready as soon as you’ve determined how much you can put in your emergency fund each month.
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