Deciding to make a budget is an important step in taking control of your finances. The next step is figuring out how to make a budget that’s right for you. These four steps can help you create a budget that you can stick to.
1) Figure out how much you’re currently spending
Without knowing this key piece of information, it’s challenging to create realistic saving goals, so invest a little time to figure out where your money’s going. A typical budget might include categories like mortgage/rent, food, loans, transportation, utilities, child care, and medical expenses. Some other spending categories that could make the cut are things like clothing and entertainment. Create categories that are right for you.
To accurately figure out your spending habits, try the following:
- Carry a budget notebook or another way to take notes. Every time you make a purchase, write it down and categorize it using the categories above.
- Go through your checking account line by line and categorize everything. If you use online banking, there are free websites that do most of the work for you. Know where you’re spending, without spending any effort. Once you set up your spending goals, they will also send you emails when you overspend.
In addition to the spending categories you’ve identified, you’ll want to add categories for saving. A category for retirement savings is a must. Plus, don’t forget the emergency fund savings category. Azzad financial advisors recommend that you have at least six months of living expenses set aside in an account that is easily accessible. Other saving goals might include a new car fund, a travel fund, or a charitable giving fund.
2) Decide how much you should save
How much you allocate for each of your categories above will depend on what you’ve determined you spend monthly (on average). For example, you’ll want to be sure that you allocate enough every month for transportation to cover all related expenses (you may not be paying the car insurance every month, but you should still be setting aside enough money so that when it comes due, you won’t feel the difference).
Of course, if you’re trying to lower your expenses and set aside more to save or to pay down debt, you’ll want to take a hard look at these monthly expenses and see where you think you can realistically make cuts.
Also, make room for retirement savings, too. You’ll want to transfer those savings into a tax-advantaged plan like a Traditional or Roth IRA in periodic installments.
3) Start to implement your budget
There are several ways to make this happen. Two of the most popular are the envelope system and the savings account system.
Envelope system: If you are going to use the envelope system, you’ll want to label a set of envelopes with each of your spending and savings categories and place money in them according to the amount that you’ve budgeted every time you get paid.
Savings account system: You might prefer to allocate all your categories into different accounts at a bank. Some banks allow you to have an unlimited number of accounts. Whenever a paycheck comes in, you can divvy it up among them. You can also have this done automatically.
4) Do what feels right
Remember, there’s no single way to budget. Everyone has different needs, and there is no one-size-fits-all solution. What’s important is that you find what works for you. And remember that you can always speak to your Azzad advisor for a financial planning consultation.