A budget is the perfect tool when determining how to allocate your finances. Yet, although budgets are simple to create-they are also very easy to break. Luckily, we have some simple tips that will help you stay within budget.
Tip 1: Have Defined Goals
Before you begin you must first know your financial goal(s). Like a GPS in a car, your budget is your guide to reaching your financial destination. But that’s not possible if you don’t have one! Think about it, how effective would a GPS be if you did not know where you wanted to go? The same concept applies with your finances. Having clearly defined and attainable goals will greatly increase your chances of actually sticking to your budget.
Tip 2: Use After Tax Income
After you figure out your financial goal(s) you need to make sure you are inputting the correct numbers. Have you ever noticed that whenever rental companies (such as apartment complexes) determine if you can afford your rent they use your gross pay. The same applies for credit card companies and other lenders. Virtually every institution uses your gross pay. So, naturally when you make your own personal budget you should use your gross pay as well right? Wrong!
Your gross pay is not the same as your after-tax income. For instance, an individual may gross $3000 a month however he or she may actually receive $2160 a month after taxes (assuming 28% bracket). That’s an $840 difference! As you can see if this individual were to create a budget using the gross income he or she would be in the negative every month. To make your budget more accurate you need to use your after-tax pay. This can be found by simply glancing at your pay stub or calculated by plugging some figures in at paycheckcity.com.
Tip 3: Underestimate Income & Overestimate Expenses
Now that you have your correct income figured out we need to address the variations within your budget. Believe it or not your income and expenses change rather frequently. For example, taking a day off from work may cause your income to drop. While a family event (like a birthday party or wedding) may cause an increase in your expenses. To account for these everyday changes we suggest overestimating your expenses and underestimating your income. By implementing this over-under technique you create an inert buffer within your budget. Why is this important? Well, imagine you created a budget when you were healthy and able to work full-time how do you think your finances would be impacted if you were to suffer an illness and were not able to maintain that same schedule? According to bankrate.com the number one reason people go into debt is due to having a reduced income but the same (or higher) expenses. By having a budget that has a built in buffer you give yourself a cushion that can either inflate to allow for more protection or deflate to allow for more spending.
Life is unpredictable. Unfortunately, this means that without proper planning your finances will also be unpredictable. Having a budget is the best tool to guide you along your financial journey. Continuing the GPS analogy your budget needs to constantly update and has different routes depending on your financial goals. By using your after-tax income and overestimating your expenses and underestimating your income you will be able to create budgets that can easily adapt with whatever situation comes your way. If you need more help or would like us to create a customized budget for you click the button below: