How to Build a Budget: Part 1
Living on a budget. It can sound scary, right? Setting up an effective budget and sticking to it can be intimidating. But we’re here to show you that it’s actually not that difficult to create and stick to a budget. With the right discipline you can achieve your financial goals. So where do you start? Here are the basics:
Step 1: Income
Calculate how much you make per month after taxes (+)
This one is pretty simple. Calculate how much you earn every month (after taxes) from your sources of income. This could include the money you make from a job and other things, such as Social Security benefits or workers’ compensation.
The amount you come up with is your baseline for how much money you have to cover your expenses.
Step 2: Bills and Essentials
Tally up your recurring bills and necessities (-)
Look at things like your utility bill, rent, mortgage or car payment, childcare, groceries, and any debts or loan payments. Then add up the total costs.
Typical examples include:
- Credit card payments
- Student loan and personal loan payments
- Insurance payments
The amount of disposable income left over after these essential payments is what we have to work with. After you’ve determined these monthly financial obligations, we can move on to the next step of the process.
Step 3: Categorization
Categorize your expenses to keep track of where your money is going
Split your expenses into different categories and then define budget goals for those categories.
Let’s take food as an example. Eating out can be delicious and convenient but it can also quickly deplete your budget. Set a limit for how much you’ll spend on groceries versus how much you’ll spend on restaurants. Continue this process for other categories like monthly subscriptions, entertainment and travel.
Mint—Mint is a service and app that helps you stay on track of your budget by helping you set goals for your categories and linking to your accounts to track of all your spending. That means every time you use your associated cards, they immediately bucket it into corresponding categories and will send you alerts if you’re close to reaching your budget or if you’ve exceeded a budget.
User note: Mint doesn’t always categorize correctly, so readjustment is sometimes necessary.
Step 4: SAVE
Save, save, save
Yes, we make money to be able to spend it. But part of being financially healthy is actively saving. Are you saving towards retirement, college tuition, or a down payment for a house? Savings can help reduce your need to take out a loan in the future.
Saving isn’t something for you to leave to the last minute. Take a percentage of what you make and automatically mark it to be set aside for the future. In one simple step, you’ve taken care of saving.
Once you have a monthly savings cushion, remember Lending Club can help you grow your money. Learn more on our investing page.
Another great service for you to consider is Digit. Digit’s premise is that it monitors your checking account and sees patterns for what money you don’t count on, and sets that aside into savings for you. It deducts little bits of cash and slowly helps you save—and should you need the money, you can transfer it back at any time.
Alternatively, you can also choose to invest that money with Lending Club where we have historically offered steady returns. Go to our investing page to find out more.
Step 5: Unexpected expenses
Expect the unexpected
Life happens. Sometimes there are expenses we haven’t planned for. We know this will happen, so it’s important to set some money aside for the unexpected expense. You can set this money aside in your checking account, or choose to have it in a separate place like a savings account; wherever you put it, leave a little room for these expenses. They may not happen every month, and this will cost you a bit of your budget, but being unprepared may cost you much more.
YNAB is also an option for you to consider for your financial management.
YNAB is award-winning software for the web, iOS, and Android to help you gain total control of your money. Every detail of the software helps you follow our four simple rules and teach you how to break the paycheck to paycheck cycle, get out of debt and save more money—faster.
Stay tuned for the next part of the series where we’ll be covering: financial fitness.