How to budget like a Pro

What is a budget?

A budget is your plan for saving and spending your income. It also helps you understand how much money you can allocate towards your savings after covering all your expenses. Sounds like fun, right? Don’t worry! Budgeting does not have to be the complex task it is made out to be. On the contrary, it can be a rewarding process that will set you on the path to financial independence.

How a budget helps you out more than just saving money

Maybe your rent is too high, or you spend too much on takeout. You will most likely not fully understand your finances until you have a budget. By budgeting, you will gain insight into your spending habits, and it will allow you to control your spending so you can prioritize items that are most important to you. You will also prevent falling behind on payments because you will know exactly where and when you will spend your money. Your credit report will also reflect positively on having a budget because you are not spending beyond your means. Budgeting is a great way to see where you are financially and help you get to where you want to be.

Keep your goals in mind

What makes your budget unique from everyone else’s are your goals. Setting yourself tangible goals, like buying a car or saving for a down payment on a home, is essential before you start budgeting. These goals are your North Star that guides you through all of your financial decisions. As your goals change, so should your budget, so make sure you revisit it regularly.

How to set up a budget?

The best place to start is tracking your fixed and discretionary expenses over the past few months and bucketing them into categories. Fixed expenses are recurring ones that you need to pay each month, and you can estimate, such as your mortgage payment, rent, transportation, or utilities. These expenses take priority over discretionary expenses, which are more flexible and are often non-essential, such as your streaming subscriptions or ordering takeout for every meal. Discretionary expenses vary from month to month and are easier to adjust. Try to bucket your spending into 6-8 broad categories that fit your spending habits. Categories could include Home (rent or mortgage, and renters or home insurance), Dining (groceries, take out and dining out), or Bills and Utilities (cable, wifi, phone, gas, electric, etc.).

By tracking your costs and bucketing them into these categories from highest to smallest, you begin to understand where your money goes. You can also see if you’d like to make any adjustments to your spending habits. Setting limits across categories also helps keep you honest from month to month, ensuring you stay on track. For example, if you routinely go above your monthly limit on dining out in the first half of the month, it is a good indication that you either have to start cooking more or increase your limit and reduce spending in another category like entertainment or shopping. Budgeting also helps you make larger purchases without having to ask yourself if you can afford it or affecting your ability to pay your bills. If you have a budget, you will know what you can and cannot spend on. Most importantly, you can plan how much it will take to save up enough to reach your goals.

Once you list all of your expenses and set your limits for them, compare it with your monthly income, and hopefully, you will have some money left over to save. However, if you start and find it hard to put away for savings, don’t panic! Make a plan and prioritize items that you must spend on every month. Then see if you can reduce your spending on other things that are not essential, so you have some money left for savings. It is always important to adjust your budget as your goals change to ensure that you are productive with your money.

No matter how you set up your budget, it is best to keep all of your information in one place to get the complete picture. Feel free to use our budgeting template to track how much you have spent and saved to reach your goals.

Tips to consider when thinking about your budget

  • Check your paycheck: Understand what types of deductions besides taxes are being taken out repeatedly (i.e., health insurance, transportation spending account, retirement plan contributions, etc.).
  • Review your employer retirement match: If you can afford it, make sure you’re contributing at least the maximum amount your employer matches in your retirement plan, such as your 401(k) or 403(b) plan.

      Pro tip: Check your retirement plan documents to find out more about your employer plan and the rules to receive matching contributions. You don’t want to leave free money on the table!  

  • Don’t overdraw your account: Always leave at least one month of spending in your checking account so you can pay any recurring larger expenses such as mortgage, rent, or credit card payments and avoid any overdraft fees.

      Pro tip: Try to adjust the billing cycle of your credit cards to a few days after the end of the month, in case you need to transfer additional funds from your savings account to meet a larger unexpected expense paid with your credit card the month before.

  • Don’t forget to include larger one-off expenses:  Vacations, holiday gifting, or other large purchases which are not recurring monthly should also be included in your budget.

      Pro tip: Plan to save for these expenses gradually over the year. This way, your larger expenses accrue over a period, and you’ll be ready to pay for them as they occur.

  • Include all buy-now-pay-later spending in your budget: Keep track of your buy-now-pay-later expenses that you may have signed up for, and think of them like your subscriptions, to ensure that you are paying the proper amount each month and don’t accrue any added interest.
  • Use autopay to avoid late fees: Once you ensured that your budget is set up appropriately and you can be confident in paying your expenses, consider setting your credit cards and utility bills on autopay so you don’t get hit with late fees or interest charges.

I set up my budget. Now what?

Creating your budget is one of the first steps to financial independence. Having a clear picture of your spending empowers you to set a monthly savings goal. Developing a savings strategy to allocate your savings to different goals is the next step in taking control of your finances. Whether it’s building a rainy-day fund, saving for your next big trip, or planning for retirement, implementing a savings strategy will set you up for success in reaching your goals.

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