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Published on December 17, 2020

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

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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Mike Stuzzi

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

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips How To Create a Budget (The Complete Beginners’ Guide)

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Published on January 8, 2021

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

Ever wondered whether your credit card debt is the reason you’re in a bad financial situation? You can’t enjoy any fun activities because a good chunk of your money goes toward debt payment. Heck, you’re even behind on some of your monthly bills.

The effects of clumsy debt management are too many to list here. This guide is going to help you discover how to pay off credit card debt fast and start chasing your financial goals.

Debt problems are the last thing anyone wants to encounter. But things can get out of hand when all the “little debts” you take accumulate in interests.

What if you knew some simple and proven ways to be debt-free quickly? Implementing them would mean better financial health for you. It becomes possible to free up cash for your “wants.” These include taking a trip or buying something you’ve always desired. All that while paying your bills on time!

Let’s not wait any longer. Here are 7 powerful tips for paying off credit card debt fast:

1. Pay More Than the Minimum Credit Card Payments

Many people only pay the monthly minimum on their credit cards. Truly, that’s the right amount for staying on good terms with your credit card company. But you need a different approach if you’re looking to achieve financial independence within a short time.[1]

Most of your payments go toward interest costs when you only pay the minimum amount. A substantial sum of your balance remains standing. As a result, it becomes more expensive to eliminate your debts.

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You don’t want to wait more than 10 years to get rid of debt while it’s possible to do it sooner. All you have to do is double that $100 minimum payment to $200 or go higher.

The good thing is that minimum credit card payments are affordable in most cases. By paying a higher amount, you reduce your interest costs, lessen your borrowing period, and boost your credit score.

2. Start With High-Interest Credit Card Debt

If you have more than one credit card debt, prioritize putting the extra money toward the ones with the highest interests. This debt pay-off strategy, known as the debt avalanche method, is essential for being debt-free quickly.[2]

First, you need to list down all the credit card debts you have in the order of their interest rates. Next, you choose the one with the highest interest and pay a significant amount toward it each month. It can be an amount twice or even thrice larger than the minimum payment.

At the same time, you make monthly minimum payments on the other debts. Their interest charges won’t be as costly as that of the first debt on your list. You only move on to the next high-interest debt after the first one is gone. Remember that your focus is on the interest rates and not the balances.

3. Revisit Your Budget

Budgeting is useful for tracking your financial moves. Once you create a budget, some tweaks along the way can make it work for you better. One situation that requires you to revisit your budget is when you’re struggling with debts. It might hurt a bit to slash some expenses. But you also don’t want to miss out on achieving financial freedom in the long run.

You can reduce some variable expenses to free up more cash for credit card debt payments. They’re the ones that change from time to time. Some examples are groceries, fuel, and clothing.

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Other opportunities for cutting down your spending lie in non-essential expenses. Instead of dining out all the time, you can cook at home more to save money. You can also share some subscriptions with friends and pay a fraction of the cost.

If you’re determined enough, you can eliminate all your unnecessary expenses and focus on paying off your credit card debt first.

4. Avoid Using Your Credit Cards

Do you want to know how to pay off credit card debt with a low income? One simple way is to stop using them. Having your credit cards everywhere you go means that you’ll be more tempted to buy unnecessary stuff. In this case, you spend money that you don’t really own and get deeper into debt.

The quickest fix to stop the debt build-up is spending with cash. You’ll be more aware of everything you can afford at any particular time. If you decide to keep one or two cards to ease the transition, always make wise choices. For instance, only use them when experiencing financial difficulties.

It’s best to categorize your fun activities under “discretionary spending” in your budget. This way, you won’t need more debt to kill your boredom. By halting your credit debt from accumulating, it’s easy to pay down what you already owe and be happy with the progress.

5. Start a Side Hustle to Boost Your Income

You’re probably turning away a lot of money by not monetizing your skills. Everyone has something that they’re good at doing. And you can use that to generate extra income for attacking your credit card debt.

If you look around your neighborhood, you can find several side hustle opportunities. It can be pet sitting, tutoring, or lawn mowing. You can start an online business by offering services such as digital marketing, content creation, and web development. Such skills go in high demand on freelance sites and job boards.

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Finding clients on social media is also a good strategy to utilize your skills and make more money. Facebook groups, Quora Spaces, and subreddits are some places to look for side jobs. You only have to join a niche-specific platform, share your services, and respond to any opportunities.

It’s possible to learn a skill, practice it, and earn from it. Use the free resources online or purchase some e-courses to get started.

6. Sell Your Used Items for Extra Cash

Starting a side hustle isn’t the only way to generate extra money. You can turn unwanted items into cash for paying off credit card debt. Whether it’s an old TV, book, or furniture, there is always someone itching to buy your used stuff.

A garage sale, as much as it’s old-fashioned, is perfect for getting your neighbors and passers-by to buy from you. You keep all the money because there are no business permits or taxes involved. While you may not make much cash, it’s better than leaving your stuff to go defunct in your storage.

Other than that, you can sell your used stuff on online marketplaces. Facebook groups are great places to start if you want quick approvals and hence sales. You only have to ensure that your listing follows Facebook’s commerce policies.

When selling any pre-owned items online, ensure they’re in good shape to avoid problems with your buyers.

7. Know When to Seek Help With Your Debt

Asking for help with your credit card debt can be challenging to do. But letting it drown you is a road you don’t want to take. While you may feel embarrassed at first, it’s the best way to get back on track when you run out of options.

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There are tons of non-profit credit counseling organizations that can offer you free guidance on how to escape the debt trap. An example is The National Foundation for Credit Counseling. They simply review your finances and help you determine the source of your financial problems. After that, they match you with an actionable debt management solution.[3]

In extreme cases, the debt solution can be:

  • Debt relief – where your debt is partially or wholly forgiven
  • Debt consolidation – taking out one loan to repay others
  • Debt settlement – the creditor forgives a significant portion of your debt
  • Bankruptcy – legal process for seeking relief from some or all your debts

It’s necessary to carefully weigh your options before deciding on the way to go. Find out how it might affect your credit score and any other risks.

Wrapping It Up

Debt is a major setback when you’re trying to prosper in life. Paying off credit card debt is essential if you want to reach your financial goals. That means having more free income, a good credit card score, and even a chance to retire early. You become more productive each day because of the peace in your mind.

So, you now have some tips on how to pay off credit fast. Go ahead and get rid of that good life progress killer!

More Tips on How to Pay Off Debt

Featured photo credit: rupixen.com via unsplash.com

Reference

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