Creating a budget can help you cover your bases, afford fun things you’d like in the present, and be better prepared, financially, for the future. In fact, 85% of people who budget say1 the process helped them either get out or stay out of debt.
With the holidays behind us, there’s no time like the present to take stock of your spending and saving, and make any necessary adjustments to put you financially ahead of the game in the new year. No matter what the year ahead brings, creating a budget that you can realistically stick to is a great way to start. Here’s a rock-solid way to come up with yours.
Get to know your disposable and discretionary income
Whether you use an online tool or an app, an Excel spreadsheet or simple pencil and paper, the first step to creating a solid budget is understanding how your income and spending are related:
• Determine your disposable income: Start by gathering how much money you have coming in from all sources each month, including take-home pay (salary minus taxes) from however many jobs you have, and any other sources of income.
• Find out where your money is going: Next, create a new list with two columns. In the first, list your fixed or essential expenses. These expenses include things you must pay for every month, like rent or mortgage, cell phone, transportation costs, groceries, insurance, utilities, etc. In the second column, gather your flexible or lifestyle expenses, including items that fall into categories like entertainment, clothing, subscriptions, or memberships. These things are typically not necessary for your day-to-day life, no matter how much you enjoy them.
• Calculate your discretionary income: Subtract your fixed or essential expenses (the amount in your first column) from your disposable income to get an amount that’s called your discretionary income. This is the amount of money you have left to spend on the items in your second column, as well as other financial goals.
Take stock of your other financial goals
Before using all your discretionary income to pay for the lifestyle items in your second column, consider your overall financial goals and how they may have changed over the past year. Maybe you had a baby and would like to reconsider your living quarters, buy a new car, or start saving more money. Some other financial considerations that may impact your budget include:
• Emergency savings: If you haven’t already, experts recommend saving three to six months’ worth of fixed or essential expenses (more doesn’t hurt, especially in volatile economic climates) in a savings account that’s specifically intended to cover any unforeseen emergencies that may crop up.
• Insurance: If you have a full-time job, your health insurance is likely partially covered by your employer, with the amount you’re responsible for coming out of your paycheck automatically each month. If you need additional healthcare, or if yours isn’t covered by your employer for whatever …….