A realistic budget should match your lifestyle, as well as your goals you hope to accomplish. Understanding how you spend money can help you plan and save for the future. In this Financial Wellness Series, we will discuss 3 steps to create a realistic budget. They include: understanding current spending, considering goals and emergencies, and choosing a budget for you.
1. Understand your current Income and Expenses:
Before creating your budget, you need to understand your income, or how much money you have coming in, and your expenses, or where your money is going. This step can be difficult for some because it requires you to be honest about your spending habits and record every purchase.
An easy way to record your money is to use spreadsheet tools such as Microsoft Excel or Google Sheets. You can also access Nerd Wallets’ free budget worksheet.
2. Consider Your Goals and Potential Emergencies
Now that you understand your income and expenses, it’s time to consider your goals and potential emergencies.
Your Emergency Fund should be a top priority when starting your budget. Financial experts recommend setting aside at least three months’ worth of living expenses. This fund is to help protect you from debt for any unexpected costs such as auto repairs, medical emergency, or loss of income. Three months may seem like an intimidating amount, but whether you set aside $5 or $100, every little bit will get you closer to your goal.
With your emergency fund figured out, start thinking about your other goals. Do you want to buy a new home or car? Need to save for college or a vacation? Start identifying tangible goals and prioritize which is most important to you.
A great way to help you reach these goals, whether it is your emergency fund or your trip to Europe, is to open a high-yield savings account. This way, you will be earning interest on the money you’re setting aside.
3. Choose a Style of Budget that Works for You
You now have the foundation to create a budget that meets your needs. When choosing your budget style, the best method is one that matches your lifestyle and the money trends you identified in the first step.
Two standard methods of budgeting include:
- Envelope method: After creating a budget, envelopes can be used to divide cash by category. For example, categories could include rent, entertainment, travel, etc. This form of budgeting is designed to help you maintain a budget and help you understand your spending.
- 70/30 or 70/20/10 Rule: The Penny Hoarder describes how this method of saving divides your income so that 70% goes to expenses, 20% goes to savings and debt, and 10% goes to charity, etc.
Remember, these budgeting methods are just a starting point and the best budget for you may be a combination of a few different styles.
To set up an appointment with a credit counselor and to make your daily budget a little easier, call or text our local Service Center Team at 231.946.7090.
Ready to master budgeting and plan for your future? Learn more about how to crush your savings goals with these educational resources:
- Access our FREE budget worksheet
- Use Nerdwallet’s FREE Budget Spreadsheet
- Check out these top budgeting apps of 2022 suggested by Forbes.
- Learn more about the importance of an emergency fund and how to save on Insider.com.
- Read more about the 70/20/10 budgeting method on Penny Hoarder.
- Discretionary spending ruining your budget? Learn about how to better manage your purchases with Wendy De La Rosa on TED Talk.
- Check out the Federal Trade Commissions tips for budgeting.
*These resources are for educational purposes only. These are not official partners or sponsors of TBA Credit Union.