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4 Steps for Making Your Budget

Man and woman sitting in home looking at laptopWhether you're just starting with your budget or you've been at it a while, creating a budget is a key part of your overall financial well-being. Often, we tend not to have a plan for money and hope it ends up working out. Budgeting is the first step toward financial health. Creating a budget doesn't have to be overwhelming. It can be pretty simple and straightforward.

1. Figure out your net income

When looking at your income, there are two key terms to know: net income and gross income. Your gross income is how much you're earning before your employer makes any deductions for things like taxes, social security, health insurance, or other programs they may offer. Your net income is how much you take home once those deductions are made. When working on your budget, you'll want to know your net income because this will be your starting figure.

2. Take a look at your expenses and your spending

This is the more work-intensive part of your budget, figuring out how much you need to spend in a month. You'll need to determine your fixed expenses. These include car payments, groceries, utilities, childcare, and rent. While your utility and grocery bills can fluctuate, these are all expenses you know you will have each month, and you know approximately how much they will be. 

3. Figure out your savings and debt priorities. 

Once you've determined how much in fixed expenses you'll spend each month, subtract that figure from your net income. This amount is how much you have left for savings, extra debt repayment, and discretionary expenses. This is your disposable income.

Net Income:
Fixed Expenses: -$800
Disposable Income: $600

In this example, the $600 would be the amount we're working with from here on out. Determining how much of the $600 goes towards saving, debt repayment, or discretionary expenses is unique to you and your goals. You know yourself, and some discretionary expenses are important that you include in your budget. So, make sure you include the cost of your gym membership, your streaming service, or a certain amount for going out with friends each month here. If paying down debt is your priority, then put 70% of this part of your budget towards debt repayment and 30% towards saving. Suppose you're working towards a savings goal and feel your debt is under control. In that case, you may want to put more of your disposable income toward your savings account. 

The most important part of this step is making sure any disposable income is going where you actually want it to go rather than blowing it all in the spur of the moment.

A note about discretionary expenses: Discretionary expenses include anything that is a want, not a need. This tends to be where people can make the most room in their budgets or make the biggest mistake in not factoring in their discretionary expenses. Discretionary expenses sometimes get a bad rap. Many of us know the age-old adage, "You'd be able to afford a house if you didn't spend all your money on avocado toast." While we're not sure that's true, we encourage everyone to be realistic with their budgets and make room for discretionary expenses when possible. Accounting for discretionary expenses makes sticking to your budget easier. 

4. Actually follow your budget

Now that you've outlined your expenses, the next step is executing the budget you created for yourself. You might need to reevaluate your budget after using it for a couple of months. Are you spending too much per month at your favorite restaurant? Cutting it out cold turkey can be tough. It may be easier to scale back how often you eat out. In practice, you can also use a free budgeting software or keep track of your expenses in a spreadsheet. 

At the end of the day, you can also think of budgeting as being more intentional with your spending, saving, and debt payment habits. Furthermore, just as it's true that small expenses add up quickly, so do small savings. Sticking to a budget at first might feel like a significant adjustment, but it will serve you and your family better in the long run.

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