Building a budget can be a great way to plan for the future. According to a recent Gallup poll, only 32% of Americans had a monthly budget to track income and expenditures and only 30% had a long-term savings plan. At First Federal Bank, we're here to help you create a budget or adjust your budget due to recent changes in your life. Here are the basics of how to make a simple budget, and why you need one.
Why You Need a Budget
Many people in the United States could use help in getting on solid financial footing. According to a PWC survey, financial stress is at its highest in years, and Millennials are feeling it more than others. A 2015 Federal Reserve Report surveyed Americans to check the pulse of our nation’s financial wellness and found that: 47% wouldn’t be able to cover an emergency expense of $400 and 22% spent more than they made within the last year. Having a budget and building in savings will help you create an emergency fund and spend within your means.
1. Calculate Your Net Income and Expenses
The first step toward creating a simple budget is to figure out how much money is coming into your household, and how much money is going out. Your gross income is the amount of money that you earn before taxes and other deductions such as health insurance are taken out of your paycheck. What you’re left with is your net income, or take-home pay. Your expenses include electricity, phone plan, mortgage or rent, food, gas, vehicle payment and other things you pay for on a regular basis.
The first goal of creating a budget plan is to make sure you aren’t spending more than you’re bringing in each month, and that you have enough left over to save for the future, and have a little fun.
2. Put Your Budget in Writing
A good way to put your budget in writing is to create a budget spreadsheet. Most spreadsheet programs come with built-in templates that can help give you a head start by having the basics outlined and formulas calculated. There are also apps and computer programs that help you create a budget plan. Whatever you decide, you’ll want to have your budget in writing or available online so that you have something to stick to.
Next, you’ll want to categorize all your fixed and variable expenses. Some categories to start with include housing, clothing, entertainment, food, and vehicle expenses. This will help you to see how much you’re spending in each category, and help you see if you are overspending in a certain area.
Did you know that Excel even offers a Family Budget Planner template? They have done this work for you by breaking up the expenses into these common categories:
- Housing: all your bills for mortgage/rent, gas or oil, electricity, water/sewer, cable, maintenance, etc.
- Transportation: car payments, bus/taxi fare, insurance, fuel, maintenance
- Loans: personal, student loans, credit cards
- Insurance: home, health, life, etc
- Entertainment: : movies, concerts, sporting events, etc
- Food: groceries, restaurants
- Children: medical, clothing, tuition, lunch money, child care, toys, school supplies, etc.
- Personal Care: medical, clothes, dry cleaning, gym membership, etc.
- Taxes: federal, local, state
- Legal: alimony, lawyer fees, payments
- Pets: food, vet/medical, toys, etc.
- Savings/Investment: retirement, investments, savings, college, etc.
- Gift/Donation: charities, church
3. Set Your Savings Goals
Now you’ll want to think about your short and long-term goals. Do you want to buy a house? Go on vacation? Save up for your children’s education or pay down credit card debt? Outlining your goals and how much you’ll need will help you figure out a savings plan. For example, if you are saving up for a $3,000 vacation, you’ll need to save $250 each month for the next year.
There are many different theories on how much you should allocate to various categories in your life. Some suggest putting aside 10-15% of your net income towards your priority goals, like investments, savings or paying down debt. For many people that might not be realistic, so the best advice is to save as much as you can so that you can enjoy your life instead of just pay your bills.
4. Review Your Spending
Now you’ll want to figure out how much you’ve been spending in each category. A good rule of thumb is to allow yourself 30% of your budget towards variable or flexible spending items, 50% towards your fixed expenses and 20% towards your goals. This is called the 50/20/30 guideline.
If you notice that you’re spending way too much on eating out, give yourself a smaller restaurant budget each month. And, if you see that you’re spending more than you’re taking in, or living paycheck to paycheck, you’ll want to get creative on how you can earn more money, or cut down on expenses, or a combination of both.
5. Use Online and Mobile Banking to Automate
Now it’s time to put your budget into action. When you bank with First Federal Bank, you can take advantage of online and mobile banking. If you know you need to put aside a certain amount of money each month into your savings account, set up an automatic transfer between your checking and savings accounts. You can also use Bill Pay to schedule bill payments.
Building a budget doesn’t need to be complicated but is an essential part of being a responsible adult. Let our online tools helps you – and if you want to connect with one of our bankers for help, contact us.