What is a budget and Why should you make one?
Budgeting is the process of creating a spending plan. Budgeting ensures you will have enough money for the things you need. This includes everything from daily necessities like housing and food to unexpected expenses. Budgeting also helps you forecast and save for future spending goals. Lastly, budgeting can help you stay out of debt or work your way out of debt.
How to get started
The first step to creating a budget is to figure out where your money goes. Estimate and categorize your expenses. Common items/categories to include in your budget include food, housing/rent, utilities, entertainment, transportation. More info here.
Keep track of your spending in these categories for a month or two.
- Lots of budgeting tools and apps are available to help with this. If you prefer, you can also keep track using a pen and paper or a spreadsheet file.
- Tip: Credit card and bank statements are a good place to start since they often itemize or categorize your transactions.
- Tip: To get a quick and dirty budget estimate, you can monitor your spending for a shorter period of time, say, a week, and then extrapolate these results to estimate monthly expenditures. Note, although this may be quicker and less of a hassle, it will also be less accurate in accounting for monthly spending variations.
The second part of budgeting is to analyze your spending. What do you spend the most money on? Did anything in your spending patterns surprise you? Where do you think it would be easiest to cut back?
Total up your monthly expenses and subtract them from your income. If you’re spending more than you’re earning, you will need to make some changes to avoid falling into debt.
- Some questions to ask yourself:
- What are the things you want vs the things you really need?
- Are there things you’re paying for but not using?
- Can I shop around to get a better deal?
- Reevaluate, reprioritize, adjust your spending:
- Nice-to-have to not strictly necessary expenses are the first area to look for spending cuts
- Carefully consider trade-offs
If you have some left over money – great! Time to make some financial goals.
- With one or more goals in mind, develop a plan to meet your goals.
- Use past spending habits as a guide to predict your future expenses – how long will it take to reach your goals?
- Adjust your spending to reach your goals faster.
Staying on track
Aim for a budget that is measurable, actionable, and realistic. Including these three criteria in your planning will help you stick to your budget and increase your likelihood of success.
Additional budgeting resources
(From MIT Student financial services)