What Should Be Considered When Setting A Budget?

Setting a budget might sound about as fun as doing your taxes, but trust me, it doesn’t have to be a drag! Think of it as planning your future, making sure you have enough for those big dreams, and yes, even being able to order your favorite dinner in on Friday night. Whether you’re just starting out or need a little refresher, let’s break down the key factors you should consider when setting a budget!

1. Know your income: What’s coming in?

First things first—how much money do you have to work with? This includes your paycheck, any side gigs, or even that extra money from the outfit you sold to your friend that you bought in the wrong size.

Knowing your total income is the foundation of your budget. Without it, you’ve got nothing to build on!

Use budgeting apps like YNAB (You Need A Budget) to keep track of your various income sources. This way, you’ll always know exactly what you’re working with each month.

2. Track your expenses: Where is your money going?

Ever wonder where your money goes at the end of the month? Tracking your expenses can feel like detective work, but it’s crucial.

You might be surprised to see how much you’re spending on takeout or that streaming service you forgot to cancel.

Grab a notebook, app, or even a spreadsheet and start jotting down every penny. You’ll gain some serious insights into your spending in no time!

For example, let’s say you’re spending $200 a month on coffee shop runs. By switching to home-brewed coffee, you could save around $1,800 a year—enough for a nice weekend getaway!

Now, I’m not saying you shouldn’t buy your favorite coffee, instead, focus on mindful spending!

When I was creating my budget back when I was a new mom, I had to consider a lot more than just the usual expenses. With twin babies at home, the cost of diapers, formula, and baby gear quickly added up.

My priorities were ensuring that all the baby essentials were covered, setting aside savings for their future, and making sure I didn’t overspend on non-essentials. And so I made sure I was being mindful of my expenses based on these priorities.

3. Categorize your spending: What’s really necessary?

Now that you’ve tracked your expenses, it’s time to categorize them. Divide your spending into needs (like rent and groceries) and wants (like that daily coffee run).

This is where you find out what’s really necessary and what can be cut back. Think of it as Marie Kondo-ing your finances—does that expense spark joy?

You can use color-coded spreadsheets or budget apps that automatically categorize expenses for you. This makes it easier to see where your money is going at a glance.

4. Plan for the unexpected

Life is full of surprises, and not all of them are good. From car repairs to emergency vet visits, unexpected expenses can throw a wrench in your budget.

Nearly 60% of Americans don’t have enough savings to cover a $1,000 emergency. Creating an emergency fund can help you avoid this common pitfall.

Imagine your car suddenly needs a $500 repair or new tires. Without an emergency fund, you might have to dip into your savings or even take on debt. By setting aside even a small amount each month, you can avoid this financial stress.

Setting aside a little extra for these surprises can keep your budget intact. It’s like carrying an umbrella on a cloudy day—better safe than sorry!

5. Set financial goals: What are you aiming for?

Whether it’s saving for a vacation, paying off debt, or just building an emergency fund, having clear financial goals is key.

Your budget should help you reach these goals. Break them down into manageable steps, and celebrate your progress along the way. Think of it as leveling up in your favorite video game!

Create a vision board or use a money savings chart to visually track your progress. This can keep you motivated and focused on your goals.

6. Adjust as your budget as needed

Budgets aren’t set in stone. Life changes, and so should your budget. Whether you get a raise, lose a job, or just find that your spending habits have shifted, it’s important to revisit your budget regularly. Think of it as tuning up your car—regular maintenance keeps everything running smoothly.

So, review your recurring expenses at least once every few months. This helps you spot any expenses you no longer need, allowing you to adjust your budget accordingly.

7. Don’t forget to have fun: You can still enjoy life!

Budgeting doesn’t mean giving up all the things you love. In fact, you should set aside some money for fun activities—whether it’s dining out, hobbies, or treating yourself to something special.

It’s like getting your favorite daily coffee —just because you’re budgeting doesn’t mean you can’t enjoy life!

Allocate a small portion of your budget to “fun money” each month. This helps you stay on track while still enjoying life’s little pleasures.

8. Automate your savings

One of the easiest ways to stick to your budget is to automate your savings. Set up automatic transfers to your savings account, so you don’t even have to think about it. It’s like setting your coffee maker the night before—wake up and it’s already done!

Most banks and credit unions offer automatic transfer options. Set it up so a portion of your paycheck goes directly into your savings, making saving effortless.

9. Create a budget that works for your lifestyle

Every budget should be as unique as the person using it. Tailor your budget to fit your lifestyle and priorities.

If you love to travel, allocate more funds to your travel budget. If dining out is your thing, plan for it in your budget. The goal is to create a budget that reflects your values and goals.

Involve your family or partner in the budgeting process. This ensures everyone is on the same page and makes budgeting a team effort.

10. Plan for the long-term to secure your future

Budgeting isn’t just about today or next month—it’s also about planning for the long term. Include retirement savings and other long-term goals in your budget. Even small contributions can add up over time, helping you secure your financial future.

Consider setting up a separate savings account for long-term goals, like saving for retirement or a down payment on a house. This keeps those funds out of sight and out of mind, so you’re less tempted to dip into them.

Expert tip: Align your goals with your passions for an effective budget

By aligning your budget with your passions and what truly matters to you, you are more likely to stick to your budget.

For instance, if traveling brings you joy, set up a dedicated “Travel Fund” and automate your monthly contributions. This way, you’re not just saving money—you’re investing in experiences that enrich your life.

Budgeting isn’t just about restriction; it’s about making sure your money supports what matters most to you.

When should you review recurring expenses in your budget?

You should review your recurring expenses regularly—at least once every few months. This helps you spot any subscriptions or services you no longer use and allows you to adjust your budget accordingly. It’s like cleaning out your closet—keeping only what you need and love.

What are necessities in a budget?

Necessities in a budget include things like housing, utilities, groceries, transportation, and insurance. These are the must-haves, the non-negotiables.

But don’t forget, a little fun and self-care can also be necessary to maintain a healthy and balanced life. So be sure to build those things into your budget as well once your necessities are covered.

What is not true about unexpected expenses?

The myth that you can predict or avoid all unexpected expenses is just that—a myth! No matter how well you plan, life can throw curveballs.

And those curveballs create unexpected expenses that can derail your budget. The key is to be prepared, not perfect. This is where your emergency savings comes into play.

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Consider these key factors when setting up your budget!

Setting a budget doesn’t have to be a chore. With these tips in mind, you’ll be on your way to financial peace of mind, all while still enjoying the things you love. Happy budgeting!