Tower Loan Blog

How to Create a Budget

Over 80% of American’s have something they don’t want: debt. Once you have it, it can be hard to manage.

Fortunately, by learning how to create a budget, debts can be cleared. Then, you can finally start to save money.

Is your spending out of control? Do you find yourself wishing you knew how to set up a budget?

If you need to start saving and work towards clear financial goals, the first step is learning how to set a budget. A budget will forecast how much money you expect to earn and compare this amount to your upcoming expenses and discretionary spending.

Once you know how to budget, you’ll realize that this financial calculation is an efficient tool for achieving financial freedom.

What is a Budget?

A budget can be defined as an estimation of expenses and revenue over a specific period in the future. These estimations are compiled and re-evaluated periodically.

The purpose of a budget is to track, plan, organize, and improve your financial situation. Tasks such as consistently saving, controlling your spending, and investing your income can all be achieved by creating an effective budgeting plan.

Making a Budget: Basic Tips to Follow

If you want to know how to create a budget, follow the tips below:

Focus on What’s Important First

Saving should be at the top of your list as you create a budget. Next, emphasize necessities such as utilities, shelter, food, transportation, and essential clothing. Once all these are taken care of, fill out the rest of your budgeting plan categories.

Implement a Zero-Based Budget

Before the start of a new month, make a plan that accounts for every dollar earned and spent. The plan should include your income minus all expenses. With a zero-based budget, your balance should sit at zero each month.

Pay Off Your Debts

Prioritize paying off your debts by chipping away at them little by little. Slow progress leads to satisfying results—as long as you’re patient.

Track Your Progress

Check back on earlier budgets to monitor your progress, and don’t forget to celebrate small accomplishments.

Creating a Budget: Mistakes to Avoid

When figuring out how to budget correctly, it’s also important to be aware of mistakes to avoid.

Don’t Set an Unrealistic Budget

One of the most frustrating mistakes made when planning a budget is under-budgeting. Try not to leave yourself with less money than you need, as this could discourage you from budgeting altogether.

Track and Adjust

Try using a budgeting and spending app to help you control your spending and saving. Many of these apps connect with your financial accounts and send you regular progress reports to motivate you to continue budgeting.

Don’t Leave Things Out of the Budget

Imagine you have a weekend away planned, and you’ve decided to leave it out of the budget. Without incorporating these costs into your budget, you risk taking money from other categories to justify the spending. This can throw your financial planning into disarray.

How to Make a Budget Plan

Calculate Your income: Write down how much money you earn after taxes each month. If your wages vary, note down an average. The more accurate you can be, the better.
Calculate Your Expenses: Try to split your monthly spending into sections. Most people choose groups, such as housing, utilities, transportation, and food. After these ‘primary’ sections are added to your plan, add ‘secondary’ sections like vacations, dining out, splurges, etc.
Calculate the Difference: Are your expenses more significant than your savings? If so, you have two choices; make more money, or spend less. In most cases, it’s easier to reduce spending compared to making more money. So, comb through your budget and decide what you can cut back on.
Spend Savings Wisely: Use your savings to consolidate debts. Also, consider investing your money in order to set yourself up for a brighter financial future.
Make Budgeting a Habit: Review your budget every couple of weeks to track your spending habits. Once you confirm what needs to be changed, make budgeting a habit. You’ll start to reach your financial milestones in no time at all.