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How to Build a Budget

Hey Bestie,

This is not my first budgeting blog post. But I realized, maybe let's do a breakdown of the anatomy of a budget. It is very common to feel overwhelmed by the thought of building a budget and even scarier to stick to one. We are going to tackle the first problem-building a budget. If this sounds like you, you're not alone. The good news is, building a budget is simpler than it seems and is a powerful step towards taking control of your financial health. This blog post is designed to guide you, step-by-step, through creating a personal budget that works for you, no matter your financial literacy level.

Understanding Your Income

The foundation of any budget is knowing how much money you have coming in. Knowing how much you have is the very first step and CANNOT be ignored or skipped. It's essential to calculate your total monthly income after taxes, including all sources. Whether you have a steady paycheck, freelance for various clients, or have any other income streams, each contributes to your overall financial picture. For those with irregular earnings, average your last three to six months of income to get a more stable figure. Remember, overestimating your income can lead to overspending, so it's important to be as accurate as possible.

I usually will take my most recent paycheck and multiple that by how many times I get paid within a month. That gives me a great estimate of what my incoming money is for the month since I get paid salary. If you do get paid irregular earnings follow above!

Fixed vs. Variable Expenses

Distinguishing between fixed and variable expenses is a crucial step in understanding your spending habits.

Fixed expenses are those that remain relatively constant each month, such as rent, mortgage payments, or car payments.

Variable expenses can fluctuate, like food, entertainment, and shopping. To get a handle on your variable expenses, track your spending for at least a month.

You might use a simple spreadsheet or a budgeting app to make this easier. This exercise is eye-opening and helps you identify areas where you can potentially cut back. Knowing exactly where your money goes each month is the first step in taking control of your finances.

Allocating Savings

An essential part of your budget is savings. Ideally, you should aim to save at least 20% of your net income, but even a smaller percentage is a good start, especially if you're new to budgeting and if you have any short term debt. Begin with building an emergency fund that can cover three to six months of living expenses. This fund acts as a financial safety net for unexpected situations like medical emergencies or job loss. After building the emergency fund, start saving for your financial goals. Whether it's a vacation, a new car, or a down payment on a house, having a dedicated savings category for each goal can help you stay disciplined and focused.

My current favorite way to save and specify my savings while earning high-yield interest, is using Sofi. Sofi allows you to automate reoccurring saving deposits to different goals. While earning ~4.5% interest on each goal bucket-therefore helping you get closer to your goal. Join today using my referral link to get a free $25.

Debt Management

Debt can be a significant burden in your financial life, but a well-structured budget can help you manage and eventually eliminate it. Start by listing all your debts, including credit cards, student loans, and car loans. Prioritize paying off high-interest debts first, as they cost you the most over time. Even small additional payments towards these debts can lead to significant savings on interest and faster debt elimination. Incorporating debt repayment into your budget not only improves your financial health but also brings peace of mind.

Money Left Over

After you list your income, then your expenses, then your savings and debt repayment. You then can calculate how much money you have left to spend however you want or save...

This is how you do it.

Adjusting and Reviewing Your Budget

Your financial situation can change, and so should your budget. Regularly reviewing and adjusting your budget ensures it always reflects your current financial goals and circumstances. Make adjustments for significant life changes, such as a salary increase, a new job, or a new family member. A monthly check-in on your budget helps you stay on track with your financial goals, identify areas for improvement, and celebrate your successes. Remember, budgeting is not about restricting your life but about empowering you to live it to the fullest, according to your financial means.

Starting a budget might seem challenging, but it's one of the most empowering steps you can take towards financial independence. By understanding and managing your income, expenses, and savings, you're laying the foundation for a secure financial future. Remember, the key to successful budgeting is consistency and willingness to adjust as your life changes. Take the first step today, and you'll be amazed at the difference it makes in your financial health and peace of mind.


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