Back to Basics: How to Build a Budget and Stick to It

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Just like you might take steps (literally, for the step-counters out there!) to keep yourself healthy, keeping your finances in tip-top state takes some legwork. One way you can look out for your financial health is by building a budget.

A monthly budget will help give you a clearer picture of how much money you have coming in and how much is going out. It’ll set guidelines for your expenses that will help you understand how much you can set aside for those bigger ticket items, like saving for a down payment or an emergency fund. And it provides the insight needed to highlight areas where you should tighten your belt.

Even if you’ve never balanced a checkbook and always look at your online account balance with one eye shut, building a budget can start with a few simple steps. Here are some suggestions for how to get started.

Step 1: Look at your paycheck.

To create a budget, you first need to know your net monthly income or after-tax income. This is your monthly take-home pay, not your total salary — an important distinction when figuring out how much you can spend on a monthly basis. Knowing this number is the first step to creating a spending strategy.

Step 2: Distinguish your needs from your wants.

Now it’s time to make a list of your essential expenses. This involves separating your “wants” from the “needs.” Needs usually include things like:

  • Housing costs (monthly rent or mortgage payment)
  • Transportation costs (car payment, fuel, public transportation)
  • Utilities
  • Food
  • Insurance
  • Internet, cable, and phone bills

Once you’ve tallied those costs, add them up and deduct your needs total from your after-tax income. Make note of that number.

Step 3: Calculate how much your wants cost you.

Next, outline all the things you spent money on that don’t fall into the “needs” bucket, and tally up the total. The easiest way to do this is to look at your credit card statements from the last month or two. If you use cash to pay for things, keep a log for several days (or better yet, a couple weeks) of all your expenses.

Once it’s all written down, use a critical eye and note where you’re being your own worst enemy by overspending or wasting money on things you don’t need (or even want). Strategize on how you can modify your behavior to reduce these unnecessary expenses.

While it’s a-okay to splurge on occasion (we fully support treating yourself and your ship-in-a-bottle collection — or whatever floats your metaphorical boat), it’s important to do so in moderation.

Step 4: Add up all your costs.

Jot down the total amounts of your “needs” and “wants” and see how they stack up against a common rule of thumb: the 50/30/20 budget. This popular money management plan says you should spend 50 percent of your take-home pay on needs, 30 percent on wants, and put the remaining 20 percent toward savings and any debts you may have, like school loans or revolving credit card debt.

Don’t panic if your current financial picture doesn’t align with this ideal ratio. It can be difficult to stick to this plan, especially if you’re new to the workforce and possibly paying down student loan debt.

But that’s exactly why a budget can be so useful. Matching up how much you spend to established guidelines can be a helpful way to identify where everything’s lining up — and where you can put in a little more effort and reduce your spending.

Step 5: Keep it up.

Now that you have your budget created, here comes the harder part: sticking to it.

When it comes to minding your numbers, try out some of these tips:

  1. Be a stickler.
    While putting 20 percent of your take-home pay toward savings and debt isn’t technically considered a “need,” try to treat it as one. Avoid dipping into that bucket to pay for “wants,” so you can pay down debts and afford future unknowns, should something arise. In fact, you could remove temptation by setting up monthly automatic savings transfers.
  2. Break it down.
    If a monthly budget isn’t as manageable, try chopping it up into a weekly segment. A shorter time frame can make it easier to stay on track. That way, you won’t discover that you’re already pushing the limit of your budget with a week left in the month.
  3. Log on regularly.
    Along those same lines, keep track of your purchases as they happen instead of totaling them up at the end of the month. Checking your balance online or reviewing your recent credit card charges is a great reality check for daily expenditures.
  4. Get everyone on board.
    If other people (like your partner or roommate) are supposed to follow your budget, make sure they’re on board with the financial goals you’re trying to meet. Involve them in the planning and share the impact of their spending on the 50/30/20 model to avoid accidentally going off the budget rails.

Budgeting doesn’t have to be the complicated or intimidating task that it’s often made out to be. Follow our simple guide, and your monthly budget will help keep your finances in check.

Discussion questions:

  • Which expenses take up the biggest part of your budget?
  • Which items cause you to derail from your budget?
  • How do you stay motivated to stick to your budget?

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