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Published on December 17, 2020

How To Create a Budget (The Complete Beginners’ Guide)

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How To Create a Budget (The Complete Beginners’ Guide)

Are your finances in bad shape because of poor budgeting? Panic no longer! In this article, you’ll learn how to create a budget that lets you stay ahead of your bills, save more money, and pay off debt.

Budgeting is the key to proper money management. Most people don’t create a budget because they think it’s tiresome and limits how they spend their money. In reality, budgeting is useful for tracking your income and expenses.

How would you like to hack your finances with a killer budget? It would put an end to most of your problems and improve your financial situation.

Forget the bad rap you might have heard about budgeting. You don’t need a strict budget to achieve your financial goals. It’s possible to be on a budget and still have a little fun from time to time. That’s my aim for you here!

This article will guide you on how to create a budget that works.

7 Simple Steps to Create a Budget That Works

It’s easy to get lost in your finances. Below are the steps on how to create a budget and learn better financial management for beginners.

1. Set Specific Goals

What do you want to achieve from budgeting? It helps if you have a detailed answer to this question before you begin creating your budget.

Most of the time, the goals of financial management revolve around saving, investing, or spending money on something within a particular period. If you’re specific enough on what you want, your budget will clear the way toward making it happen!

Let’s say you want to save money for a new car. It’s best to decide on a specified model and work toward meeting the price. It’s challenging to track your progress and be productive when you have random goals.

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Don’t make the mistake of only budgeting to “free up some cash” without knowing how to put it into use. You might be successful at freeing it up, but there are high chances of the extra money going into fun activities and other unnecessary expenses. And that’s no progress at all!

Look at these tips on How to Set Financial Goals and Actually Meet Them.

2. Gather All Your Financial Records

Your financial records are essential for creating a successful budget. You want to be sure that everything you put down aligns with these documents.

They include the following:

  • Bank statements
  • Credit card statements
  • Utility bills
  • Insurance policies
  • Mortgage contracts
  • Retirement and investment statements
  • Receipts

The more documents you can find, the easier it becomes to structure your budget. You should always store your important financial records somewhere safe for future reference. This way there’ll be no more guesswork when making significant financial decisions.

3. Find Your Net Income

In this step, you need to find an exact figure for your monthly earnings. Your income reports come in handy in this case. They show you all the money coming in and hence, how to create a budget that works.

Keep in mind that it’s the after-tax income and not the total salary that we’re talking about here. This income is what remains after federal, state, and withholding taxes have been applied.

If you’re employed and usually receive a regular paycheck, it’s easy to find your net income. You can add any automatic deductions back to the after-tax amount and put down the associated expenses in your budget. These deductions include money payable on 401(k) plans, insurances, and savings.

As for your other income streams, such as part-time jobs, you only have to deduct any applicable taxes and business expenses. It’s best to use the lowest monthly earnings you’ve ever gotten within the past year. This approach increases the accuracy of your net income and therefore, your budget.

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4. List Your Monthly Expenses

You need a comprehensive list of everything you pay for each month. Most monthly expenses occur in the following categories:

  • Housing
  • Food
  • Health
  • Transportation
  • Utilities
  • Entertainment

Review your bank statements, credit card bills, recent utility bills, and receipts from the past few months to get a clear picture. If you have any credit card debt, student loan, or personal loan, add them to the list. Be sure that it’s the monthly payment on the debt balance and not the whole balance.

Savings are also an essential part of a budget. A good saver doesn’t save money as an afterthought. Setting aside a particular amount that goes into savings is crucial for achieving financial success.

You can include debts and savings in the categories they fall, such as housing or transportation. But don’t double-count anything!

5. Determine Your Fixed and Variable Expenses

First, you should determine your fixed expenses for each month. These are the expenses that remain constant over a long period.

It’s improbable that you’ll find a chance to cut back on your fixed expenses, but having them on your budget shows you where your money goes month after month.

They include the following:

  • Mortgage
  • Rent payments
  • Utility bills
  • Loan Payments
  • Car, house, and health insurances

Next, find out your variable expenses. They’re the ones that change from one period to another. Depending on your consumption, you can find something to slash a bit and put the extra money toward savings, investments, or debt payment.

Bear in mind that the term “variable” comes from the act of fluctuating and doesn’t mean that the expense is unnecessary.

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Variable expenses include the following:

  • Groceries
  • Car maintenance
  • Household maintenance

If you find it challenging to come up with an amount for any variable expense, calculate the cost for the past year and divide it by 12. It’s also good to prepare yourself for the next few months. This approach saves you from financial disaster in case a variable expense becomes higher than expected.

6. Calculate Your Monthly Income and Expenses

Once you have the totals of your income and expenses, work out the difference between them. Lower expenses and higher earnings mean that you’re good to go. You can save the extra money or put it into meaningful investments.

On the other hand, higher expenses and lower earnings indicate that you’re overspending and must act fast. If you find yourself in this case, you can either start generating more income or reduce your spending.

Most of the time, it’s much easier to cut down your expenses than to find a high-paying side gig or start a successful business overnight.

7. Change Your Spending Habits

If you’re spending more than what you earn, you have to adjust your expenses and allow room for achieving your financial goals. This is key to mastering creating a budget. The same applies if you feel like your expenditure doesn’t suit your path to financial freedom.

Most of us spend money on non-essential things from time to time. It could be dining out, buying new outfits, or going on vacations. What if you could replace all that with cooking at home, only buying clothes for special occasions, and going on staycations?

Figure out the expenses you can eliminate and those which you can skip for some time. It’s best to start slowly by getting rid of one unnecessary expense at a time. Within no time, you’ll be able to live without them and allocate your money to other useful things.

The 50-30-20 Budget Rule

Now that you know the basics of how to create a budget, the next step is to know how to reach your financial goals. Below is a guide on how to use the 50-30-20 budget rule to reach your financial goals faster.

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1. Spend 50% of Your After-Tax Income on Your Needs

The 50-30-20 budget rule states that you should limit your needs to 50% of your after-tax income.[1] These include all your monthly expenses—fixed, variable, and non-essential expenses.

You should determine all the expenses that you deem “needs.” In most cases, they’re the ones you necessitate. Forgoing them has significant impacts on your life. For instance, housing, utilities, and groceries fall under the category of needs.

2. Spend 30% of Your After-Tax Income on Your Wants

Your wants are the things you desire, but you can live without them. Don’t start thinking about trips, high-end restaurants, and beautiful clothes yet. You may want to fix the “little things” that bug you before you go into luxury.

How about repainting your house, doing cosmetic repairs to your car, or upgrading your home Internet? The list goes on. You only have to picture your situation and find out what your meaningful wants are.

3. Spend the Remaining 20% on Savings and Debt Payments

The least percentage of your after-tax income that should go toward savings and paying debts is 20%. You shouldn’t only allocate the amount that remains at the end of your budget to these purposes. If any extra cash comes up after you’ve applied the 50-30-20 budget rule, put it into savings and debt payment.

Bottom Line

Budgeting is a financial habit that comes with many benefits. One of the best benefits of budgeting is that you get a chance to take control of your finances.

With proper money management, you can be debt-free, pay bills on time, and save more money.

Now that you know how to create a budget, you better start making one!

More Tips on How to Create a Budget

Featured photo credit: Kelly Sikkema via unsplash.com

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Reference

More by this author

Mike Stuzzi

Mike Stuzzi is an Internet entrepreneur and personal finance blogger at The Money Galileo.

How To Save Money On Groceries: 13 Quick Tips How To Pay Off Credit Card Debt Fast: 7 Powerful Tips How To Create a Budget (The Complete Beginners’ Guide)

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Last Updated on July 20, 2021

Financial Freedom is Not a Fantasy: 9 Secrets to Get You There

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Financial Freedom is Not a Fantasy: 9 Secrets to Get You There

Have you ever considered your life now, and how it would be if you had more time to spend with your family and less worries about money?

Nowadays, financial stress is one of the most troublesome weights in life. If you’ve ever encountered financial stress, you know the difficulty of not having enough income to pay your obligations or bills.

Many people say that money is not the ultimate goal of life. While that’s true, money certainly plays a very significant role. The meaning of financial freedom changes with the different phases of our life, but ultimately, it is something that many people strive for.

In this article, we’ll explain how to capture that financial freedom you’ve been looking for. Read on to learn the secrets to financial freedom.

Break Free of Your Finances

Financial freedom is about having a constant flow of cash from your assets to cover all your regular needs.

When you are not worried about your income, or living paycheck to paycheck, you gain a great sense of freedom. It’s the freedom to be obtain and do what you truly need to make your way through everyday life.

Gaining financial freedom, though, is a process of growth, making small improvements and gaining emotional strength.

Though it seems hard to believe, it is really very simple to get financial freedom.

To do so, you simply need to make sure that your assets exceed your liabilities. In other words, you’ll need to find the sweet-spot where your residuals meet or surpass your expenses. This is something that you can achieve with the proper plan.

While not every person will accomplish financial freedom, the potential for anyone to do so is certainly there. Anyone can achieve this success, regardless of their income level.

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Outlined below are 9 secrets that will help you in your goals of achieving financial freedom.

1. Stop Unnecessary Spending

We often spend money inwardly, instead of objectively.

For example, you may spend when you’re anxious, depressed, restless, exhausted, from fear of missing out, or to please others. This is a very unhealthy way to handle your finances.

To stop this habitual spending, log down all your spending over the course of a month.

Just as some people keep a food diary, keep an expense diary. Remember not to just write down how much and what you spent the money on, also include the circumstances of why you spent the money. Was it an impulse buy at the checkout line or was it something you planned to purchase?

This increased self-awareness could enable you to avoid triggering situations in the future when you are considering an impulse buy.

2. Plan a Monthly Budget

This is a great opportunity to get serious.

Take a seat with your spouse or partner and make a monthly budget based on your income, not your expenses. You are never again going to spend more cash then you have on hand.

Overspending is the thing that led you to more financial obligations. Make sure you decide every month what is coming in and what will be going out and stick to that budget… no matter what.

3. Cut-up Credit Cards

Perhaps you are the type of person who always pays your credit card balance in full before the end of your billing cycle, and enjoys the reward points you gain. If this is the case, then you’re already way ahead of the game.

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If not, you may want to consider ridding your life of the burden that credit cards bring.

Many cards have strategies set up so that if you make a certain number of late payments, they will raise your interest rate much higher. This can really add up in the long run and you won’t be doing your financial situation any favors. If you’re prone to late payments or have a large balance due on your cards, cut them up!

Without proper self control on credit card spending and payments, you are basically throwing your money away. To ensure that you have better control over your spending, use only cash or debit for all future purchases (and don’t forget to pay at least your minimum payment on your cut-up cards each month!).

4. Increase Savings

There is no doubt that for a comfortable retirement you must accumulate satisfactory savings throughout your working life.

It’s good practice to save up to 15% of your income.

Start with your workplace 401(k), if you have one. If not, a Roth IRA (if you are eligible) or a traditional IRA (if you are not eligible for the Roth) are the next logical steps.

Increase in longevity means you might be able to look forward to 25 to 30 years in retirement, or possibly even significantly more. Investing now in good retirement plans will ensure that you have a guaranteed a stable monthly income when the time comes to stop working. [1]

5. Invest Wisely

Consider investing in funds.

Specifically, you will gain higher returns if you invest in different types of mutual funds such as Debt funds, Equity funds and Hybrid funds with a proper balance, although it absolutely relies on your personal preferences and sense of risk taking.

To get the most of these benefits, make sure you are investing in a variety of assets. Another resource of investing in mutual funds is SIP (Systematic Investment Plan) where you invest some money every month in funds. SIP works by averaging the per unit price of the stock.

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Mutual fund investors are aware of the benefits of an SIP (Systematic Investment Plan). For one, it is the most secure way to invest in equity mutual plans so that wealth is created over a long period of time. This plan also helps you to gain a better sense of financial discipline, which will come in handy in all your financial endeavors.

6. Invest in Gold

There isn’t really a better way to invest in gold than to have the physical gold itself in your possession.

You can purchase gold coins and bars from mints as well as from coin dealers and other private sellers.

Another way to invest in gold is through ETFs (Exchange Traded Funds).

These are is similar to mutual funds but they are exclusively investments of gold. ETFs are great because they offer more liquidity; the ETF owns the actual physical gold, stores it, and retains the value of the shares. These shares can then be bought and sold in the stock market, and one big benefit is that the transaction costs of gold ETFs are much lower than the that of physical gold.

With its consistently-increasing demand, investment in gold can be very wise long-term investment to make.

7. Stash Emergency Funds

Whether it’s a cash gift or a work bonus, always try to save any extra money that comes your way rather than making unneeded purchases.

If you get paid every other week, you’ll get an “extra” paycheck (three rather than the usual two) twice a year. Either save those paychecks towards your emergency funds or utilize the money to pay down other obligations, such as loans, credit cards or other debts.

Make it hard to get your cash.

Put your savings in an alternate bank, maybe an online bank that forces you to delay for several business days before transferred money hits your regular bank account.

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8. Find Fabulous Mentors

Find a mentor, such as a friend or family member, who has exceptional control over their finances and pay attention to everything they do.

If you do not have any friends or family that are enjoying financial freedom, then find a mentor online! There are numerous blogs and guru websites featuring the advice of many people who have reached financial freedom, and they exist primarily to let you in on how to achieve it for yourself.

There are also plentiful forums available that share tips and tricks on how to best achieve financial freedom. Read as much as you can and start changing your habits for the better.

9. Be Extra Patient

Patience is the key of financial success.

Being patient can be quite tough, especially when you’re struggling with your finances, but having faith is worth it. You’ll continuously be on the right track if you are taking the proper steps above.

So don’t be discouraged, even if you are only saving a few dollars a month; it all adds up. Within just a few years you’ll look back proudly at your accomplishments and be glad that you had the patience to get there.

Financial Freedom for All

Anyone can achieve financial freedom, regardless of their financial circumstance.

Use the tips provided above to get yourself on the track to financial freedom and toss your monetary concerns out the window. If you wish to achieve a life with financial freedom for yourself and your family then you must adopt a disciplined approach towards your finances.

Following the simple secrets above is a great start to making your money work for you, so you can work less and live more!

Featured photo credit: rawpixel via unsplash.com

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Reference

[1] Hartford Gold Group: IRA Retirement Accounts

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