Saving money is a worthwhile goal, but it can be difficult to know where to start. One of the most important steps is to set a budget. A budget is a plan for how you will spend your money. You need to know how much money you make and how much you spend each month. Then, you can figure out how much money you can afford to save. This will help you reach your financial goals.
Once you have a budget, it is important to track your spending. This means keeping track of every dollar you spend. You can use a spreadsheet.
Stage 1 Calculate your salary
The foundation of an effective budget is your income. That’s the salary you take home minus deductions for taxes and employer-provided programs such as retirement plans and health insurance. Focusing on your total salary instead of net income could lead to overspending because you’ll think you have more available money than you do. If you’re a freelancer, gig worker, contractor or are self-employed, make sure to keep detailed notes of your contracts and pay in order to help manage irregular income.
Stage 2 Monitor your spending
Once you know how much money you have coming in, the next step is to figure out where it’s going. Monitoring and categorizing your expenses can help one determine what they are spending the most money on and what they should cut off their expenses. Begin by listing your fixed expenses. These are regular monthly bills such as rent, car maintenance, groceries, electricity and water. Next list your leisure expenses like entertainment such as events, drinks and traveling. This is an area where you might find opportunities to cut back. Record your daily spending with anything that’s handy a pen and paper, an app or your smartphone, or budgeting spreadsheets.
Stage 3 Set realistic goals
Make a list of your short and long term financial goals. Short term goals should take around one to three years to achieve. Long-term goals, such as saving for retirement or your child’s education, may take decades to reach. Note your goals don’t have to be set in stone, but identifying them can help motivate you to stick to your budget. For example, it may be easier to cut spending if you know you’re saving for a vacation.
Stage 4 Make a plan
What you’re actually spending and what you want to spend. Use the variable and fixed expenses you compiled to get a sense of what you’ll spend in the coming months. Then compare that to your income and priorities. Consider setting specific and realistic spending limits for each category of expenses.
You might choose to break down your expenses even further, between things you need to have and things you want to have. For instance, if you drive to work every day, fuel counts as a need. A monthly drinking habit is more of a want than a need. This difference becomes important when you’re looking for ways to redirect money to your financial goals.
Stage 5 Refocus and adjust your spending to stay on budget
Now that you’ve documented your income and spending, you can make any necessary adjustments so that you don’t overspend and have money to put towards your goals. Look towards your “wants” as the first area for cuts. Can you skip movie night in favor of a movie at home? If you’ve already adjusted your spending on wants, take a closer look at your spending on monthly payments. If the numbers still aren’t adding up, look at adjusting your fixed expenses. Could you, for instance, save more by shopping around for a better rate? Such decisions come with big trade-offs, so make sure you carefully weigh your options.
Remember, even small savings can add up to a lot of money. You might be surprised at how much extra money you accumulate by making one minor adjustment at a time.
Stage 6 Review your budget regularly
Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track. Few elements of your budget are set in stone. You may get a raise, your expenses may change or you may reach a goal and want to plan for a new one. Whatever the reason, get into the habit of regularly checking in with your budget following the steps above. Saving money is important for future endavours.
