Moving out and getting your own place is exciting, and it can also be a bit scary, especially if this is your first time living on your own. Having your own place may be more expensive than you may think, so creating a budget can help you manage your money and ensure all of your expenses are covered. Here is what you need to know about creating a budget.
What Is a Budget
A budget is an estimate of expenses and a financial plan to pay for those expenses over a given amount of time. A budget can help you better understand your finances and make informed decisions to allow you to live comfortably now and prepare for the future. Some people may look at a budget as restraining or forcing yourself to go without, but that is not the case at all. A budget is about making intelligent choices and learning how to balance what you need with what you want while also looking out for your future.
Tally Up Your Monthly Expenses
You may not think you have a lot of expenses, but when you start adding everything up, you will quickly realize just how much money you spend each month. Your monthly budget should include rent, utilities, food, transportation, debt, personal items like clothing and hygiene products, medical, and entertainment. When creating a monthly budget, make sure to include expenses that you may pay quarterly or annually, like insurance or some streaming or membership services.
Most of these expenses are straightforward. Your situation will dictate the total cost of each item. For instance, transportation may mean bus or subway fare in cities. In contrast, in areas requiring a car to get around, transportation will include all costs tied to maintaining a vehicle. Entertainment can consist of everything from streaming TV services to going out to eat or going on vacation.
How to Break Things Down
Most experts agree that a 50/30/20 split is the best way to spend your budget. A 50/30/20 budget means 50% of your monthly income should go towards essentials like rent, food, and transportation. Dedicate 30% to things you want, like going out to eat or a gym membership, and lastly, put 20% of your monthly income into savings.
The Value of a Savings
It is not always easy to build up savings, but you should save money if you can. So many unexpected costs can add up, and having a cushion can help you cover these bills. For instance, if your car breaks down and requires repairs that cost more than what you set aside each month for essential transportation costs, then having savings can be crucial. A savings or emergency fund is about planning for the unexpected and can help you deal with hard times or difficult situations more efficiently, at least in terms of finances.
Track Your Spending
Creating a budget is helpful, but a budget only works if you stick with it. Tracking your spending and tallying up just how much you spent at the pump or deciding to skip a trip to the coffee shop can be tedious and maybe even a bit frustrating. However, committing to a budget can be rewarding and set you up for future security and success.
Change is the only constant, so make time to review your budget periodically. You may need to make adjustments if you move and your rent goes up, or maybe you take a safety course, and your car insurance goes down. Your budget should accurately reflect your expenses. Also, make sure to adjust your budget if your income changes. Getting a raise or changing jobs can make a significant change in how much money you have in your budget.
Feel Free to Customize
The 50/30/20 rule works for many people, and if it works for you, you should continue to follow it. However, if it makes sense for you to adjust how you allocate your budget, then you should do so. For instance, you do not need to dedicate 30% of your budget to things you want; maybe 25% or even 20% is enough. It is generally a good idea to shift any surplus to your savings. Building up savings can help you secure more financial independence and better position you to make more significant moves, like a downpayment on a new car or a house or just being able to pay for something you want without relying on credit.
Manage Your Money Wisely
Creating a realistic budget can help you live within your means and thrive. Learning how to manage your money is an essential skill that will help you enjoy the things you want while ensuring you have the things you need. It may not always be fun, but dedicating time to maintain your financial health can prove to be very beneficial if you fall on hard times or if you want to treat yourself.
