Personal Finance

How to Create the Perfect Budget That You’ll Actually Stick To

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A budget is the perfect tool to help you achieve your long-term financial goals. If you want to build your savings, then sticking to a budget can prevent you from spending money that you shouldn’t.

Unfortunately, it can sometimes be difficult to stick to a budget. However, with some planning and intention, you can build a perfect budget that is easy to follow.

In this article, we’ll show you how.

Step 1: Calculate Your Expenses

The most important element of building a useful budget is understanding your current expenses. If you aren’t sure what your expenses are each month, then it can be incredibly frustrating to build a budget. There will always be fluctuations in your spending, but you should have a rough estimate of how much you spend in monthly categories.

If you have no idea how much you spend each month, then you need to find out as soon as possible.

Fixed Expenses

For your fixed expenses, this can be relatively easy. You likely know exactly how much your rent or mortgage payment is each month. Other fixed expenses might include your cell phone bill or health care insurance premiums.

Variable Expenses

For your variable expenses, it might be more difficult to track down your monthly spending habits. Variable expenses might include your entertainment, food costs, gas, and more. A good place to start is by looking through your credit card and debit card statements. If you do most of your spending with these plastic options, then you can track down how much you spend each month. Although it will take some effort to comb through your statements, you can paint a comprehensive picture of your monthly spending.

Annual Costs

Of course, you cannot forget about your annual costs. It is very easy to overlook these while you are creating a budget, but it can cause your whole plan to be derailed. If you don’t factor these into your budget upfront, they can wreak havoc when they pop up as an expense. Annual costs might include your car insurance, property taxes, vacation spending, and Christmas shopping. Take a look at your yearly expenditures and think of any other items that you need to include in this category.

Once you have a handle on what you currently spend, take a closer look at anything that surprises you. Make spending goals for your new budget based on realistic adjustments. For example, if you are spending over $1,000 on food costs each month, then you might consider trimming back that part of your budget.

Step 2: Calculate Your Income

Accurately calculating your income is critically important. If you don’t know what your income is, then you could accidentally spend more than you earn. A pattern of living beyond your means can only lead to bad financial consequences.

Importantly, you need to determine your after-tax income. Simply knowing that you make a certain amount of money each year doesn’t factor in the taxes that you’ll owe. You might be surprised to see exactly how much money goes to taxes from your annual income.

If you have a W2 job with a regular paycheck, then it should be fairly easy to determine your after-tax income. You’ll need to take a closer look at your paystub to determine exactly how much money is coming out of your paycheck for taxes. Then do the math to determine how much money you’ll earn in a year. Make sure to factor in any unpaid time off that you plan to take off during the year!

If you are self-employed, then it can be more difficult to determine your annual income. Take a look at your records to see how much you are earning. Don’t forget to subtract any business expenses and expected tax!

Step 3: Set Aside Money for Savings or Debt

If you find that there is not a lot of room between your income and your expenses, then you might be stuck in the paycheck-to-paycheck cycle. The only way to break that cycle is to work on increasing your savings and paying down any existing debt.

Take a look at your financial picture and decide how much you need to save each month. Of course, you should think about your long-term financial goals such as buying a home or retirement. But you should also think about your short-term savings goals such as paying for a luxury vacation or purchasing a new car. You can build these savings goals into your new budget.

Although setting savings goals is important, it can be difficult to maintain these goals. After all, it is extremely easy to accidentally overspend when your favorite store has a sale. The best way to prevent overspending is to set your savings to autopilot. You can have your savings automatically transferred from your checking account to your savings account on a regular basis. This ensures that you are maintaining your savings goals without any risk of spending the money.

You can also set up your debt payments to autopay. Instead of worrying about paying your debt bills each month, the funds will automatically be transferred out of your account. You’ll have more peace of mind knowing that all of your debts are paid in full each month.

Step 4: Track Your Progress

Once you have a clear picture of your income, expenses, savings goals, and existing debt, you can create a budget that suits your needs. Come up with a plan to budget your money that will accommodate all of your needs. Don’t be too stringent in any particular area. If you make deep cuts to your budget, then you are less likely to stick to the plan. Instead, find a balanced spending arrangement that works for your finances.

As you move forward with your budget, it is critical to track your progress. In most cases, it will take several months to work all of the kinks out of your budget. Although you may attempt to account for everything, there will be some variations in your spending patterns from month to month. Track your expenditures each month to ensure that your budget is working for you.

Luckily, there are several ways to track your progress. You can try software like You Need A Budget (YNAB) or EveryDollar. If those don’t suit your needs, then try a simple spreadsheet budget tracker that you can design yourself.

Step 5: Be Honest.

It can be difficult to maintain a budget if you are not used to the idea yet. That’s okay! It will take time and practice to regularly stay within your budget. As you track your spending patterns over the next several months, look for areas that you consistently go well over or under budget.

If you find that you aren’t sticking to the budget, then make some adjustments. It is important to stay realistic about your expenses and adjust accordingly.

For example, if you regularly overspend on groceries each month then consider increasing that category in your budget. However, if you really cannot cover the extra expense, then work on spending more responsibly.

Most importantly, be honest with yourself about your financial means and your physical needs. Find a way to balance the two and create a budget that can help you achieve your goals.

The Bottom Line

A budget doesn’t need to be a scary idea that takes the fun out of life. In fact, when you build the right budget for you, it can provide a useful tool to help you achieve your goals. It may take some time to build the perfect budget, but don’t beat yourself up over your mistakes. Budget mishaps will happen along the way. The key to a successful budget is how you react to these mishaps. Find a way to adapt your budget to continually meet your changing needs over time.


How to Create the Perfect Budget That You'll Actually Stick To

This blog post was published by Axos Editorial Team on September 9, 2020 and last updated on September 9, 2020.

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