Author: Alicia Rose Hudnett / Source: Wise Bread
Budgeting is one of the most important tenets of personal finance, and it’s no small thing. Everyone should know exactly what goes into making a budget — it dictates your current living situation, and determines how much you can save to support your future living situation.
Follow these five steps to get started.Step 1: Automate essential, recurring living expenses
Let’s start with the basics: Add up all monthly household income and make a list of all necessary monthly expenses, like housing, utilities, and groceries. Since these are nonnegotiable expenses, take time to set up automatic payments to cover as many of these items as you can. In many cases, you can even choose the day you’d like your bills to be debited from your account, so consider when you get paid each month. Arrange to have your bills automatically deducted when you know you’ll have cash available.
Next, subtract your bills from your income. If there’s no money leftover after paying your bills, or you’re not able to cover your bills, there are only a few viable options: Make more money, get another job, or spend less. If you’ve got extra money after paying your bills, move on to step two. (See also: Build Your First Budget in 5 Easy Steps)
Step 2: Automate savings
Generally, you’d like to get your personal savings rate to 15 percent of your gross income. If you’re saving for other big-ticket items, like a home or college education, in addition to retirement, you may need to save more.
Yes, everyone’s situation is different and everyone is at a different point in their lives — but if you have available cash, you should be saving something. Set up automatic transfers from your checking account to your savings account on the same schedule as your other essential bills. (See also: 5 Ways to Automate Your Finances)Step 3: Establish a debt reduction plan
Debt and credit are vital aspects of our financial system and allow individuals to accomplish their dreams, like owning a home or paying for college. But high levels of consumer debt, including student loans and credit cards, can stunt your ability to save and can negatively affect your borrowing ability. One common bench mark is to limit your consumer debt repayment to 20 percent or less of your net monthly income.
If you’re having a hard time meeting your financial obligations and goals because of a heavy debt load, make a list of all outstanding debts owed, including the total amount due,…
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