How to Create a Budget
Financial literacy is the ability to understand and make use of a variety of financial skills, including personal financial management, budgeting, and investing. It also means comprehending certain financial principles and concepts, such as the time value of money, compound interest, managing debt, and financial planning.
Achieving financial literacy can help individuals avoid making poor financial decisions and help them become self-sufficient and achieve financial stability. Key steps to attaining financial literacy include learning how to create a budget, track spending, pay off debt, and plan for retirement. Educating yourself on these topics also involves learning how money works, setting and achieving financial goals, becoming aware of unethical/discriminatory financial practices, and managing financial challenges that life throws your way.
How to Create a Budget
Creating a budget is one of the simplest and most effective ways to control your spending, saving, and investing. You can’t begin to improve your financial health if you don’t know where your money is going, so start tracking your expenses against your income, then set clear goals.
One budget template that helps individuals reach their goals, manage their money, and save for emergencies and retirement is the 50/20/30 budget rule—spending 50% on needs, 20% on savings, and 30% on wants.
How Do I Create a Budget?
Budgeting starts with tracking how much money you receive every month; minus how much you spend each month. You can do this on an Excel sheet, on paper, or in a budgeting app—it’s up to you. However you track your budget, clearly layout the following:
Income: List all sources of money you receive in a month, with the dollar amount. It can include paychecks, investment income, alimony, settlements, and money you make from side jobs or other projects, such as selling crafts.
Expenses: List every purchase you make in a month, split into two categories—fixed expenses and discretionary spending. If you can’t remember where you’re spending money, review your bank statements, credit card statements, and brokerage account statements. Fixed expenses are the purchases you must make every month. Their amounts don’t change (or change very little) and are considered essential. They include rent/mortgage payments, loan payments, and utilities. Discretionary spending is the category for nonessential or varying purchases for different things like restaurant meals, shopping, clothes, and travel. Consider them “wants” rather than “needs.”
Savings: Record the amount of money you save each month, whether it’s in cash, cash deposited into a bank account, or money you add to an investment account or retirement account like an IRA or 401(k) if your employer offers one.
Now that you have a clear picture of money coming in, money going out, and money saved, you can identify which expenses you can cut back on if necessary. Subtract your expenses from your total income to get the money you have left at the end of the month. If you don’t already have one, put your extra money into an emergency fund until you’ve saved three to six months’ worth of expenses in case of a job loss or other emergency. Don’t use this money for discretionary spending. The key is to keep it safe and grow it for times when your income decreases or stops.