A budget is a financial plan that outlines how you’ll spend and save each month. It helps you understand your income and expenses so that you can make informed financial choices.
The goal of budgeting is to make sure your expenses do not exceed your net monthly income, which is your total paycheck after taxes and deductions. To do this, you’ll need to identify and calculate all of your fixed expenses (such as mortgage or rent, utilities, food, transportation costs including gas, insurance premiums, taxes, childcare, and cell phone service) and debt payments (including credit card minimums).
In addition to identifying fixed expenses, you’ll want to look at your variable spending—things like groceries, dining out, clothing, gifts, and entertainment. Review your recent spending, or use past receipts to estimate these amounts.
Once you’ve figured out your expenses, you’ll compare them to your income to see where you might be able to cut spending. For example, you might find that a certain food item isn’t really worth the extra cost of organic produce, or that you can save money by skipping dinner out once a week or two.
Often, you’ll also have to consider unforeseen expenses or emergencies that arise. These might include a medical bill, vehicle repair, or a home improvement project. To help prepare for these unexpected costs, many people recommend allocating a miscellaneous category within their budget to cover these items. Having this money set aside each month will help you avoid unnecessary stress and financial emergencies in the future.