Making a budget is a deceptively simple yet powerful tool. On the surface, it seems easy: make sure your expenses don't exceed your income. That's it. That's the whole secret. However, as soon as you sit down to do that, a whole lot of complicating factors arise, and that's where it gets confusing. These six basic principles can help you get your finances in order.
First of all, know your income. Take your paycheck, bank records or online pay stub and calculate exactly how much money you have coming in on a monthly basis. If you work an hourly job or have an otherwise irregular paycheck, take an average. It's a good idea to lowball this average. Overestimating your income will do you no favors at all when it comes to budgeting. Now is the time to be mean to yourself.
Next, look at your set expenses. Odds are, in this day and age, your rent or mortgage will make up the bulk of your monthly set expenses, but this will also include your monthly utility bills. Don't forget to account for bills like water or homeowner's association fees that might only come once a quarter. You might have debt that you're paying off, and those payments should be included. Add in your usual grocery bill and you've got your baseline expenses for survival. These are the expenses that you generally can't do much about. Being water and electricity conscious can help, as can shopping for a better deal on your communications and internet plans, but there just won't be a whole lot of wiggle room there. Subtract these set expenses from your income, and that's the amount of money you have to work with.
Putting money into savings is not really optional, but it's also not always realistic. Especially for the bulk of Americans who are struggling with low pay or skyrocketing student debt, savings might not be immediately available. If your company has a retirement plan, put as much into it as you can, especially if it's the kind of plan that includes matching contributions. However, beyond that you really should be building a cushion of savings for emergencies. You never know when an unexpected emergency will put pressure on your bank account.
Once you've set aside a certain amount for savings, whatever remains is for flexible expenses. The more you manage to save on your set expenses, the more you can slip into savings and flexible expenses. It's important, from time to time, to reward yourself for good fiscal behavior with a few frivolous expenses. Limiting your flexible expenses to money you have leftover after you've put money into savings may seem like it limits your ability to make large purchases, but that's not so. It's just that paying off those large purchases then becomes part of your set expenses.
Maximize and Minimize
The trick is to find a balance between maximizing income and minimizing expenses. You can maximize income by asking for that promotion and raise that you know you deserve, or by picking up a side gig to bring in a little extra cash. You can minimize expenses by buying energy efficient appliances and other tricks to save money on utilities and set expenses as well as hunting for bargains to save money on flexible expenses.
Ask For Help
Last but not least, if you get in a jam, ask for help sooner rather than later. Utility companies may have payment plans that you can take advantage of, and even credit card companies and banks may be able to help you, but you have to ask first.
That's the long and the short of budgeting. Budgets are not rigid, nor are they one size fits all. While the principles of budgeting may be simple, the reality is anything but. Nonetheless, budgeting is an incredibly powerful tool that anyone can use at any time to get their finances in better shape.