As we continue to see the prices of groceries and other daily staples climb, now is the perfect time to develop a budget to help you stay on top of your finances.
In May 2021, the U.S. Bureau of Economic Analysis estimated that, on average, Americans had more than 12 percent of their income left over after paying expenses and taxes.
So, where does your money go and what should you do with any excess funds? Read on to learn more about creating - and sticking to - a budget.
Review your income and expenses
Before building your budget, it's important to understand how much you earn compared to how much you spend each month.
To do this, jot down a list of your approximate monthly expenses, making sure to break them up into different categories so you can see where your money is going. Examples include mortgage/rent, insurance, taxes, utilities, child care expenses, food, car payment, gas, student loan payments, credit card bills, entertainment, retirement savings and contributions to college savings plans, among other categories.
If you pay for expenses like car insurance once or twice a year, divide those yearly costs by 12 so you can log the monthly cost of the expense.
Subtract your monthly expenses from your monthly income. If you do not get paid every month, take your annual income and divide by 12 to get your approximate monthly earnings.
This calculation will help you better assess whether you have a surplus of funds or whether you need to cut some of your expenses.
Create your budget
Now that you have a better snapshot of your finances, you are ready to develop a monthly budget.
Step 1: Consider adopting either the 50-30-20 or 70-20-10 budgeting plans that both ensure you are stocking money away in savings. A good rule of thumb is to have a savings large enough to cover three to six months of living expenses.
For the 50-30-20 plan, you would:
- Spend 50 percent of your take-home pay on monthly needs like rent or mortgage payments, car loans, insurance, child care expenses, food, utilities and other necessary costs
- Spend 30 percent of your earnings on your wants - things that are fun like travelling, eating at a restaurant, going to the movies and participating in other leisure activities and hobbies
- Save 20 percent of your earnings for future expenses and retirement savings
For the 70-20-10 plan, you would:
- Spend 70 percent of your take-home pay on your needs and wants
- Save 20 percent of your pay for future expenses and retirement savings
- Donate 10 percent of your pay
Step 2: Find a budgeting app or create a budgeting worksheet to document your typical monthly income sources and expenses.
WaFd Bank offers MoneySync, a free online app-based budgeting tool where you can create and track your spending. Through the tool, you can quickly assign a category to your expenses, like food or entertainment. You can also create different debt scenarios to easily see which credit card or loan you should pay first.
Step 3: Write down (or electronically document) what you estimate you will make, spend and save each month. Every day - or at designated points during the month - record your actual income and expenses. Look closely at your budget at the end of each month to see how well you are stacking up against your estimates.
For a little extra help, WaFd Bank's mobile banking app allows you to check your balances on the go and set up alerts when you spend money.
Make adjustments, if needed
The great thing about a budget is that it can always be modified. If you face unexpected expenses, having a budget allows you to visually see where you can make changes to free up the necessary funds. This could mean reducing your entertainment expenses for a couple of months, lowering the amount you send to savings for a while or finding other ways to trim your current spending.
Don't worry if you get off course with your budget. Tomorrow is a new day and it's never too late to get back on track.
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