1) Determine your Net Income
Creating a budget begins with determining your net income. Your net income is the gross income you have after taxes and other deductions have been accounted for. This number can vary monthly depending on overtime, bonuses, or other forms of additional compensation. Being accurate in assessing your net income is a very important first step in creating a budget.
To determine your own net income, look back at your past pay stubs and calculate the average amount you've earned in the last 6 - 12 months. This will give you a realistic expectation of your monthly income and creates a strong foundation for your budget.
2) Know your Expenses
Once you've determined your net income, you can begin tracking your expenses and determining where your money is going. Understanding your income and expenses is essential to creating a budget that works for you and can take you closer to your financial goals. A helpful way to start this process is by writing down your monthly expenses. Consider all bills, such as rent or mortgage payments, car payments, utilities, groceries, entertainment costs, loan payments, credit card bills, and other purchases. After categorizing them, calculate how much you are spending each month on each type of expense. Remember irregular bills, such as annual insurance premiums or membership dues, which may not occur every month.
3) Determine your Savings Goals
Before you begin budgeting, take some time to decide how much money you’d prefer to save each month. It’s recommended that you write out some of these savings aspirations in the form of short-term and long-term savings goals. Short-term goals include things like an emergency fund or savings for a vacation. Long-term goals are useful when considering items like retirement savings or a down payment on a house.
When deciding how much to save each month, be realistic. Start by estimating how much you would like to save each month and gradually increase that amount as your budget allows. Make sure to consider any potential changes in income or expenses that are likely to arise to help you stay aligned with your savings expectations.
Once you’ve set some savings goals, it’s now time to consider how you intend to accomplish those goals. Some options include traditional savings accounts, high-yield savings accounts, certificates of deposit, money market accounts, investments, or even an automatic savings program like Smart Save. Whichever option you end up choosing, ensure that the interest rate and fees are reasonable and that your deposits will be safe and insured.
By dedicating some time toward further understanding how much you intend to save, you can start working little by little to achieve them.
4) Prioritize your Debt Payments
One of the most critical steps when creating a personal budget is prioritizing debt payments. For better or for worse, it's important to remember that not all debt is created equal. It’s recommended prioritizing high-interest debts first because the longer these debts stay active, the more money you’ll need to pay over the long run. You should also consider the minimum payment on each debt before deciding which one to pay off first.
Once you’ve gained a greater understanding of your outstanding debts and the order by which to pay them off, it can help you save money over time. For example, making larger payments on higher-interest debt can reduce the interest you will have to pay over the life of the loan. Additionally, paying off smaller debts can help build momentum as you achieve your goal of becoming debt free.
Consider consolidating your debts if possible. Consolidating your debt with a low-interest loan can allow you to make lower payments each month. This can also simplify your budget by combining multiple bills into one monthly payment.
Finally, remember to factor in your lifestyle when prioritizing your debt payments. If you are living paycheck to paycheck, it may make more sense to focus on eliminating small debts first so that you can free up money for other expenses. By prioritizing your debt payments and making intelligent decisions, you can be rest assured that you’re on the right track toward becoming debt free!
5) Make Adjustments as Needed
When creating a personal budget, there’s not a “one size fits all” solution. As your life circumstances and financial goals change, you must review your budget regularly and make adjustments as needed. For example, if you get a raise or bonus, it’s recommended you increase the amount you set aside for savings. Or, if you have an unexpected expense, you might need to adjust other areas of your budget to cover the cost.
It's important to stay flexible when it comes to budgeting. Feel free to make changes when necessary and experiment with different approaches until you find what works best for you. You may need to try different strategies until you find the right combination for your financial situation.
6) Review your Progress Regularly
Making a budget is the first step toward financial freedom, but it doesn't end there. You must continually review and adjust your budget to ensure it works. By regularly checking your progress, you can spot areas where you're spending too much, determine if you need to make any changes, and find ways to save more money.
Start by tracking your income and expenses each month. This will help you determine how much of your net income goes toward different categories, such as housing, transportation, entertainment, etc. Then, adjust your budget if you're spending too much in one area.
Another way to review your progress is to set goals for yourself. Start by setting short and long-term financial goals. Then, each month, set a plan for the amount of money you want to save or the amount of debt you wish to pay off. Tracking your progress toward these goals will give you a better idea of where your finances stand.
7) Seek Help if Needed
Creating a personal budget can be overwhelming, and you may need help getting started or staying on track. Lucky for you, there are several free resources available to help. If you’re looking for further assistance on creating a budget or with learning ways to make the most of your finances, we recommend speaking with a professional.
When seeking assistance, look for a certified financial advisor or credit counselor who has experience helping individuals develop budgets that work for them. A certified financial advisor can give sound advice on budgeting, managing debt, and building wealth. They’ll help you further understand your financial position, create a plan that aligns with your goals, and provide strategies on staying motivated and sticking to your budget.
Finding an advisor or counselor you trust and feel comfortable working with is also essential. Choose someone who you can easily communicate with and who listens to your needs and questions.
Final Thoughts
Creating a budget is a great tool to help you take control over your finances. It may take some effort, but creating a plan for your finances can also be enjoyable and empowering. Teaching you the value of setting goals and how to stay true to those goals by continually reviewing your progress along the way.
Remember that the key of successful budgeting is being realistic about your spending and income, understanding your expenses, and regularly reviewing your progress. Feel free to ask for help if you need it. MIDFLORIDA Credit Union is here to help you reach your financial goals. Get in touch with us today to learn more about how we can help you take control of your finances.
