Six steps to budgeting

The key is to find the right way to keep track of your finances


A budget is a written plan that helps you decide how you will spend your money each month, and it helps you know if you will have enough money each month.


Without a budget, you could run out of money before you cash your next check.


Plus, a budget can help you feel like you’re in better control of your finances and make it easier for you to save money for your goals, says Bank of America. The key is to find the right way to keep track of your finances. The following steps can help you create a budget, consider the US bank.


Here are the five steps to making a position, according to Bank of America: 


Step 1: Calculate your net income


The foundation of an effective budget is your net income. This is the amount of money you take home: total salary or salary minus deductions for taxes and employer-provided programs, such as retirement plans and health insurance.


Focusing on your total salary instead of net income could lead you to overspend because you think you have more money than you really do. If you are self-employed, a contract worker, contractor, or self-employed, be sure to keep detailed records of your contracts and payments to help manage variable income.


Step 2: Track your spending


Once you know how much money you’re getting, the next step is to figure out where it’s going. Tracking and categorizing your spending can help you determine where you’re spending the most money and where it might be easier to save.


Start by preparing a list of your fixed expenses. These are regular monthly bills like rent or mortgage, utilities, and car payments. Next, prepare a list of your variable expenses, which are those that can vary from month to month, such as grocery shopping, gas, and entertainment. In this area you could find opportunities to reduce expenses.


Bank and credit card statements are a good way to start, as they often break down your monthly expenses by category. Track your daily expenses with whatever you have on hand, like pen and paper, an app or your smartphone, or budget worksheets or templates you can find online.


Step 3: Set realistic goals


Before you start reviewing the data you’ve been tracking, prepare a list of your short-term and long-term financial goals. Short-term goals should take one to three years to reach and can include things like setting up an emergency fund or paying off credit card debt.


As for long-term goals, like saving for retirement or your child’s education, it could take decades to achieve them. Remember, your goals don’t have to be final, but identifying them can motivate you to stay within your budget. For example, it may be easier to cut back if you know you’re saving for a vacation.


Step 4: Make a plan


This is the meeting point of what you are really spending and what you want to spend. Use the fixed and variable expenses you recorded to get an idea of ​​what you’ll spend in the coming months. Then compare them to your net income and your priorities.


Consider setting specific, realistic spending limits for each spending category. You may want to break down your expenses further to identify what you need to have and what you would like to have. For example, if you drive to work every day, gasoline counts as a necessity. However, a monthly music subscription may count as something you’d like to have.


This difference is relevant when you’re looking for ways to reallocate money to meet your financial goals.


Step 5: Adjust the expenses to the budget


Now that you’ve documented your income and expenses, you can make adjustments so you don’t overspend and have money available for your goals. See the “what you want” section as the first area to cut back. Can you skip going to the movies one night and watch a movie at home? If you’ve already adjusted your expenses in the section of what you want, take a closer look at what you spend on your monthly payments.


When you think about it, a “need” can simply be something “hard to put aside,” Bank of America says. If the numbers still don’t add up, consider adjusting your fixed expenses.


Could you, for example, save more by looking for a better price on auto or homeowners insurance? These decisions come with big trade-offs, so be sure to carefully weigh your options. Remember, even small savings can add up to a lot of money. You’ll be surprised how much more money you can save with just a few small adjustments.


Step 6: Constantly review the budget


Once you’ve finalized your budget, it’s important to review it and constantly monitor your spending to make sure you’re on track. Only some items in your budget are final, as you may receive a raise, your expenses may change, or you may reach a goal and want to set a new one.


Whatever the reason, get in the habit of constantly reviewing your budget by following the steps above.