A budget is a monthly plan you create that splits your money into categories and helps you manage your spending and savings. Budgeting is the first step in achieving all your financial goals.
- It lets you identify how you spend money and allows you to recognize areas where you can cut back on your spending.
- It informs you about your financial situation and allows you to live efficiently and within limits.
- It keeps you honest while motivating you to reach your financial goals.
How to create a budget
Step 1—Determine how much money you make each month.
Step 2—Identify how you spend your money each month.
Step 3—Keep a journal to track your spending and savings.
Step 4—Set aside portions of the money you make each month to spend within your defined categories. For example, you will want to set aside portions of your income for essential expenses (e.g., food, transportation, necessities), financial priorities (e.g., savings, paying back debts), and your more flexible choices (e.g., shopping, eating out, charity donations).
Step 5—Consult with family members or financial experts to determine what proportions may work best for your financial situation.
Step 6—Decide where you can cut back spending.
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Calculator: How much will you have at retirement?
Think long term and examine how your budget expenses will add up over the course of a year.
For example, buying a beverage at Starbucks every day for $3 may not seem significant for a month, but those drinks will cost you $1,095 over a year.
Buying bottled water will also cost about $3 per day and more than $1,000 per year, while water from the tap will cost barely anything. You’ll save money by drinking from the tap, and it’s eco-friendly.
- You may want to rethink going to the movies every weekend. The average price of a movie ticket in the U.S. is $8. If you see one movie every weekend, you’ll end up spending more than $400 a year, which doesn’t even count the cost of the popcorn you’ll want to munch on during the film.
- According to a study by BankRate.com, when people pay with a credit card, they spend around 50% more than when they pay with cash.
- The word budget comes from the French word “bougette,” meaning “leather bag.”