Budgeting Plan: How to Stay on Track and Make Adjustments
Americans are more in debt than ever. The pandemic may be to blame for part of the increase, but studies have also shown that Americans are less financially literate than they used to be. If you’re struggling with debt, or you just want to live within your means, the first step is to create a budget.
Why a budget?
A budget can help you pay down credit card debt, save money and work towards financial goals that are important to you. Regardless of what you’re planning to do with your money, setting a budget will help you stay on track so you can realize your vision.
Creating a budgeting plan
First, make a list of your total income, including your monthly salary and other earnings from odd jobs, freelancing work, alimony or child support. When calculating your total income, don’t forget to use your net income or take-home pay, which subtracts taxes withheld and other deductions, instead of your gross income.
Next, you’ll want to track and categorize your expenses. Where are you spending the most money? For many people, housing is the biggest expense. Things like car payments, daycare, student loan payments and utilities may also account for a large portion of your expenses. Most of these expenses are fixed or don’t usually change drastically from month to month.
In contrast, variable expenses include things like eating out, credit card payments, gas, entertainment, clothes and seasonal expenses.
One popular budgeting strategy is the 50-30-20 rule: 50% of your income for essentials, 30% for fun and hobbies and 20% to repay debts and for savings. These percentages can steer you in the right direction, but they are not set in stone. You can adjust them as needed to fit your situation. Sometimes, being able to stick to a budget is more important than the type of budget plan you use.
Use this budgeting spreadsheet to help track your spending.
Common Mistakes When Setting a Budget
Avoid making these mistakes when putting your budget together:
- If you end up with more money than you expected at the end of the month or receive an unexpected bonus, you may be tempted to go on a spending spree, but it’s best to save that money instead. Avoiding lifestyle creep and living within your means is a financial skill that can help you reach your goals.
- Life changes and so does your financial situation. A good budget should be flexible and grow with you. Don’t stick with a budgeting plan that’s not working for you and remember to reevaluate your budget at least once a year to stay on track.
- Don’t forget to include automatic deductions in your budget, such as annual subscriptions, banking and lending fees, streaming and other digital services.
- When paying down your debts, be sure to pay off more than just the minimum payment or interest accrued. Put money towards the principal amount every month, otherwise you won’t make progress on the loan.
What if your expenses are higher than your income?
Overspending is a common problem that many Americans face. If you’re in this situation, you may need to make some hard choices. You’ll either have to earn some extra money, such as through a side gig or a part-time job, or you’ll have to cut expenses somewhere. This can be an uncomfortable exercise, especially if you’re part of a couple. You and your partner will have different ideas about what to cut back on. Be prepared to compromise.
What can you cut back on?
Expenses like entertainment, streaming services, clothes, hobbies and haircuts can be reduced or, in some cases, exchanged for a less expensive option. You’ll need to budget some money for fun, otherwise it may be harder to stick to the budget. Many people can safely cut back on how often they stop at the drive-through on their way to work or getting fewer clothes — or at least from less expensive brands.
What should you do when you have extra money?
As you cut back on expenses and free up some money, you’ll want to create an emergency fund if you haven’t already. Experts often recommend three to six months of living expenses. Start setting aside money, even if it’s only a little at a time. This money can be used for emergencies or unexpected expenses like repairing your car (bigger repairs, not general maintenance) or paying the deductible for a medical expense.
In addition to saving for an emergency, you should also focus on paying down your debts to avoid paying more interest down the line. Paying more than the minimum or adding a few extra dollars to your payments can help you pay the principal down faster.
Saving for retirement should also be a priority and it’s never too early to start. Consider investing in low-cost ETFs or mutual funds to help diversify investment risk and grow your money.
Budgeting may not strike you as fun, but the rewards of sticking to a budgeting plan are significant. You’ll be able to spend money on what’s really important to you and have a sense of financial security, which is priceless.