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Budgeting may seem intimidating, but creating one is an opportunity to gain control of your finances. Begin by keeping track of all income, expenses and spending each month.
Consider using a smartphone app, budgeting spreadsheet, online template or your checking account statement to keep a record of all of your transactions. The more comprehensive this information is provided, the better off you will be.
Identify Your Needs
One of the key aspects of budgeting is identifying your needs and wants. This step requires careful thought, sacrifice and can take some time. Furthermore, changing spending habits takes time; but the sooner your goals can be accomplished the faster they will come true.
Needs are those items or services essential to our survival, such as food, shelter and transportation. Wants are those items or services which add pleasure but do not impact on how we survive - such as streaming video subscriptions, morning coffee or purchasing a new phone. If it becomes difficult for you to distinguish between needs and wants, try temporarily cutting some non-essential expenses to see how you respond.
To gain a clear view of your spending habits, set aside several weeks or months recording every purchase with a notebook or budgeting app and comparing this against your income. Doing this can give you a good indication of where priorities lie and where savings from forgoing some wants can go towards debt repayment, savings or another financial goal - ultimately your budget should reflect both current needs and goals so it should be revisited regularly.
Identify Your Wants
Budgeting requires taking an inventory of both wants and needs so as to prioritize expenses accordingly, helping prevent overspending, build savings habits, and live within your means.
At first, record all of your expenses over one month. Although it may take time and some effort, this exercise will provide a clearer view of where and when you spend money - make sure every expense is listed including its name, cost and purpose of purchase.
Essential needs may include basic living expenses like food and shelter; you must cover this expense before affording anything else. Other necessities could include car ownership, phone service contracts, healthcare coverage and utilities services - these could all fall under this category too! Some could even include debt payments or loan EMIs!
To determine the difference between what's a need and want, ask yourself whether you could go a significant amount of time without it. Also consider any associated tradeoffs, for instance if buying breakfast on your way to work each morning could eat into your ability to save for vacation; similarly if spending money on private education for children can impede savings for retirement.
Create A Spending Plan
Adopting a budget is the next step towards managing your finances more effectively and saving money, meeting financial obligations and reaching long-term goals.
Start by tracking every expenditure over several weeks or months using an app on your phone, budgeting spreadsheet or online template. Bank of America clients can utilize the Spending & Budgeting feature in Online and Mobile Banking which categorizes transactions for easier tracking. Include both fixed and variable expenses - rent/mortgage payment, utilities payments and car payments should all be listed - then prioritize them according to how much of your income should go toward each category.
After compiling an exhaustive list of expenses, divide them into two piles - needs and wants - for easier analysis of where improvements need to be made in your spending habits. For instance, if you're paying more for gasoline than is necessary, perhaps shopping around can save money on this expense.
Budgeting is an ongoing process that should change with your life circumstances, such as starting a family or losing employment. Therefore, it is vitally important that your budget is regularly assessed and reviewed to account for these shifts.
Create A Savings Plan
An effective savings plan can help you reach financial goals, from buying a car to saving for retirement. It also serves as an emergency fund. The first step in developing a savings plan is identifying how much money is coming in each month; this might require tracking spending using apps on smartphones or spreadsheets that track daily transactions; it may be beneficial to review credit card and bank statements as they often itemize spending for easier budgeting purposes.
Next, compile all expenses-both fixed and variable-in order to assess how much of your income remains after deducting expenses from all sources such as your salary, freelance earnings and side gig earnings as well as 401(k) contributions. After this step is complete, categorize expenses according to needs versus wants (for instance gas for your commute may count as needs while music subscription may qualify as wants) then identify ways that you could reduce spending like eating out less or cancelling memberships and make savings goals accordingly.
Once again, set long-term savings goals that reflect what's most important to you while creating short-term goals to keep yourself motivated along the way. Reaching these smaller targets can make their payoff seem more immediate and reinforcing - helping keep you on the path towards your financial goal more easily.
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