Budgeting is one of the most important financial skills you can learn. It allows you to plan for your future, manage your finances and make sure you can cover all of your expenses each month. The best way to start budgeting is by creating a realistic budget that works for your lifestyle and situation. In this post we’ll explain what a realistic budget looks like and how you can create one that works for you!
Understand your monthly spending and income
No matter how you decide to track your spending, it’s important to understand the difference between what you earn and what you spend.
The first step is determining exactly what income sources you have each month. If they vary depending on different factors, consider setting up an automatic transfer from one account into another so that more regular income is consistently deposited into a single account each month (ideally one with low fees).
Then set aside 30 minutes every week or so to log all of your spending — this doesn’t have to be a complicated process; even just adding up specific categories at the end of each day will help give you a better idea of where all of your money goes.
Account for fun money
You might have heard of the term “fun money”. It’s the money you have to spend on things that are not essential to your day-to-day life, like going out for dinner or a movie, buying clothes or makeup, or splurging on a new gadget.
Fun money is important because it reminds us that we’re allowed to have fun with our money too. If we only focus on what we need and forget about what we wish, life starts feeling very miserable.
What are your non-negotiables?
The first step to creating a realistic budget is identifying your non-negotiables. These are things that you must have in order to survive, such as food, shelter, clothing, and transportation.
Once you’ve identified these necessities for yourself, it’s time to start looking at how much money you’ll have left over each month after those costs have been taken care of.
This is where most people get hung up on their budgets because they often don’t understand what they can do without and still survive.
Give yourself a cushion
A cushion is an amount of money you set aside and don’t touch. Think of it like a safety net that will help you meet any unexpected expenses or financial hiccups that come your way.
If a sudden car repair costs $500 and it’s not in your budget, having a cushion will help you cover the cost without going into debt.
The size of your cushion depends on several factors: what kind of lifestyle you want; how much risk you’re comfortable with; how much debt there already is in play; etc.
Factor in unexpected expenses
You should factor in a buffer for emergencies. What if your car breaks down, or you have to pay the bill for your dog’s surgery?
So what kind of buffer should you build in? Well, there are lots of factors at play here: how much money you make, how much debt you have (e.g., student loans), whether or not your partner earns more than you do, and whether or not your family helps out with money every once in a while.