Many Americans are saddled with consumer debt of some sort. Not including mortgages, the average consumer debt among Americans is $16,720, according to the New York Federal Reserve and the Survey of Consumer Finances. While there may be some things you should take on debt for, like buying a house, normal day-to-day spending shouldn’t make you go into debt. When you’re making a budget, pay attention to what things are necessities and what things aren’t. If you’re spending too much, it’s time to cut back on the extras and/or look for ways to earn more income.
2 Work backwards from what you make
A good first step to making a budget is to separate your expenses into two categories: fixed and variable. Fixed expenses are those that are the same each month, such as:
Variable expenses change monthly, and include things like:
From here, divide your spending into savings, necessities, and luxuries. Look at your total paycheck (after taxes are taken out) to determine what amounts you can comfortably spend in each category. A good practice is the strategy of “paying yourself first.” This means you build your spending plan around savings goals, instead of focusing on expenses and just saving what is left over. When you think about savings first, you might decide that earmarking money for your future down payment on a house is worth trimming your entertainment budget a bit.
3 What is a necessity?
Items like rent, mortgage, electricity, and groceries are necessities. A daily latte, the latest iPhone, and cable tv are not. Savings and necessities should always come first, and what is left over can be used for extras.
Be careful of luxuries masquerading as necessities. For example, housing is a necessity, but a luxury apartment with a doorman, swimming pool, designer finishes, and a state-of-the-art gym is not. Food is a necessity, but daily food delivery services are not. Avoid the pitfall of overspending on necessary things when a cheaper alternative will suffice.
4 Track your spending
Before building your budget, take some time (a couple of months or so) to track every penny you spend. This will tell you what you’re actually spending money on instead of what you think you’re spending money on. You might be surprised to find out just how much you’re spending on Netflix or going out. Highlight the non-essential spending that you can free up for savings.
Don’t be afraid to use tools to do this! There are a ton of great apps that track your spending. If you mostly use your credit or debit card, you can also look at the last few months of spending to categorize what’s what – this gives you a quick and easy idea of where to start cutting back.
5 Set your goals
To successfully make and stick to a budget, it is important to determine your financial goals for both the short term and the long term. Short term goals might be paying off a credit card or saving for a vacation. Long term goals take years to reach and include things like a house and retirement.
Don’t be afraid to start small and dream big when you’re setting goals. Even if you’re achieving small goals in the short term, like cutting back on take out, investing $20 a month, or improving your credit score, that will help you build towards a long-term goal – even if it seems impossible to achieve right now.
Little steps go a long way in the long run!
6 Look for ways to cut back
Even small reductions can eventually add up to substantial savings. If you dine out often, start by reducing restaurant meals by one per week and cooking more at home. If you’re stuck on name-brand groceries, store-brand alternatives might work just fine. If you typically meet friends out for drinks on Friday night, occasionally suggest a wine and movie night at home instead.
7 Your solution might be more income
The best thing about making a budget is that it’s a blueprint of the kind of life you’re living. While living within your means is essential to avoid bad debt and to build for your future, sometimes what you see when you look at the budget you’ve created isn’t what you want for yourself.
If that’s the case, start thinking about ways to make more income. That might mean investing in your education or a professional resume writer to get a better job. It might mean picking up a side hustle. It may also mean moving to a place with a lower cost of living. Whatever you choose, making a budget is an important and necessary tool to help you live comfortably now and in the future.
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