Budgets sound boring and laborious–we get it. They can feel overwhelming to create, and you are probably wondering if you will even stick to it. So what’s the point?
But budgets are incredibly important. They can create financial stability by helping you stay on track with both your income and your expenses. Having a strong, accurate budget can help you with your day to day spending while also helping you create a plan for your financial future. Whether your goal is to pay down debt, buy a house, or save for retirement, budgeting will help you succeed.
Today we are talking about budgets: why they are important, how to make one, and five things every good budget has.
Why are Budgets Important?
It can help you reduce your spending.
When you create a budget, you know exactly how much money you have coming into your bank account every month. That means that you also know how much money you can afford to spend every month. Keeping that number in mind can help you to curb your spending significantly.
It can help you feel in control.
When the bills roll in every month, it’s easy to get overwhelmed. This is especially true with variable expenses, which we will discuss later. But if you have a budget you will know what these expenses should be (approximately) and you will be able to adjust your expenses in other areas if need be. In general, budgeting can help you feel like you have a good grasp on your finances.
It can help your credit score.
Your credit score is the most important consideration in your financial life. If you are applying for a mortgage, a car loan, an apartment, or even a refinance, your credit score is the first thing that will be analyzed.
A budget won’t outright help your credit score, but it will help you by keeping on track with your expenses. People with good budgets are more likely to:
- Pay back debts
- Make on time payments
- Avoid overspending and accumulating debt in the first place
All of these factors can help increase your credit score, which will help you get approved for loans and secure lower interest rates.
5 Things Every Good Budget Has
Accurate Fixed Expenses
Fixed expenses are the costs you have every month that do not change. A good budget will have a very inclusive and accurate tally of fixed expenses. These might include the following:
- Property taxes
- Condo fee
- House insurance
- Renters Insurance
- Utilities with a standard rate (cell phone, internet, trash collection)
- Car lease or car loan payment
- Car insurance
- Subscription services
You may have some or all of these fixed expenses, and you might have other additional fixed expenses. Look through all of your bills and bank statements to make sure you have included everything. Fixed expenses are always the same month after month, so they are easy to include in a budget.
Average Variable Expenses
Variable expenses are costs that you pay every month that vary in the amount. Every good budget will have a list of these expenses with their monthly averages. Common variable expenses include:
- Utilities based on consumption (electricity, water)
- Transportation costs (gas, parking, maintenance, bus fare, etc)
- Eating out
If you have children, this list can grow quickly with sports and activities. Try to include everything. The more inclusive your variable cost list is, the more accurate your budget will be.
To get a good average of these, look back at your past year of expenses. Come up with a monthly total for each category, and then average them out.
Good budgets rely on accurate totals for fixed and variable expenses. If these numbers aren’t inclusive or accurate, your budget won’t be accurate–and therefore it won’t be helpful to you.
An Emergency Fund
All good budgets include an emergency fund. Emergencies are unpredictable, so when one strikes it can spell big trouble for our finances. Having an emergency fund can help bail you out of a tight spot. If you do not have an emergency fund set up, an unexpected medical bill or mechanic bill will really throw your finances into disarray.
How much you will need in an emergency fund varies from person to person, but the general rule of thumb is to have six months worth of expenses on hand.
One of the ultimate goals for budgeting is to create a plan for future financial goals. These goals will vary from person to person and can be short term or long term. Some short term goals may be:
- Saving for a down payment for a car or a home
- Saving for a vacation
- Paying down credit card debt
Long term goals often have a bigger price tag attached to them and can take longer to achieve. Common long term goals include:
- Paying off student loan debt
- Paying off your mortgage
- Paying off your car loan
- Creating a retirement fund
Whatever your goal is, be sure to include it in your budget. Having a goal will help you to stick to your budget and motivate you to stay focused.
A budget is not something that you create and then say, “I’m done!” A budget will do you no good if you do not regularly review it and adjust it to fit your life.
You should review it regularly, at least once every month or two. Look at how your income is matching up with your expenses. Here are a few things to consider:
- Am I spending more than I am saving?
- Which categories have increased and which have decreased?
- Are there any areas where I can cut back?
- Am I saving enough for my financial goals?
- Are there any new expenses in my life I should include?
By regularly reviewing your budget you will be more likely to adjust it as needed and keep it as a functional part of your life.
How to Create a Budget
Creating a budget is simple, but it is important that you be very organized and thoughtful throughout the process. The more organized you are, the more accurate your budget will be. Just follow our simple steps to get started.
- Be prepared. There are many apps and programs designed for budgeting (Mint and Goodbudget are two of our favorites). But really all you need is a good spreadsheet. Once you have your spreadsheet set up, dig out your credit card bills and bank statements for the last year or two.
- Determine your income. Calculate your actual take home pay (your pay minus any taxes and deductions). Add in any other income you may have–dividends, inheritance, rental payments, side hustle money–it will all add up.
- Categorize your expenses. As we mentioned before, your fixed and variable expenses are incredibly important to your budget. List them all out in your spreadsheet and go through your bills and bank statements to determine a value for every category.
- Make a budgeting plan. There are a lot of plans you can use when it comes to budgeting. A common plan is the 50/30/20 model, where 50% of your income is allocated for needs, 30% is allocated for wants, and 20% is allocated for savings. Another model is the 70/20/10 plan, where 70% of income goes towards monthly bills and everyday spending, 20% goes towards savings, and 10% goes towards debt repayment. Determine what your ultimate goal is and decide on a plan based on that.
- Budget your needs. How much do you need to live on? Determine which expenses are necessary and which are not and allocate money from your budget as necessary.
- Budget your wants. How much wiggle room do you want in your budget for the nonessentials? Going out to dinner and buying brand name items aren’t strictly necessary, but they may be things you want to include. Determine how much you can afford to spend on nonessentials.
- Budget your emergency fund and your savings. This is where your long term goals set in. How much extra money can you allocate to your savings? All extra income should end up here.
- Review and adjust. Try out your budget and see how it goes. If you need to find some extra money to include in your budget, see where you can make adjustments. Cutting out subscription services, clipping coupons, and refinancing your car loan are all easy adjustments that can add up to a lot of savings.
That’s everything you need to know about budgeting, including five things every good budget has.
If you don’t have a budget yet, here is your sign to create one. It will take a few hours to put together, but it can save you a lot of money and a lot of headaches down the road. And with the cost of everything these days, who couldn’t use some extra money?
We know a thing or two about saving money–after all, we save people hundreds (if not thousands) of dollars every year by refinancing their car loans. So if you want to save money on your car loans, get in touch with Auto Approve today!