No matter your level of income or place in life, it’s important for you to set up a budget. Most people will find little in the way of excitement when pulling up a spreadsheet and plugging in numbers each month. However, doing so is a key toward ensuring that you’re able to build wealth and achieve financial independence over time.
Assess Your Income
The first category that will show up on your monthly budget is your income. You need to assess how much money you have coming in each month. If you’re on a salary, this number should be pretty stable from one month to the next. On the other hand, you may be on commission or have uneven income. This will require a larger amount of savings to take care of the months that have lower income levels. Additionally, you will want to add in any income from side hustles or other part-time work.
Track Expenses
The next step you’ll need to take in setting up a budget that works involves tracking your expenses. Many expenses vary little from month to month. Your mortgage or rent will usually adjust once per year. Most utilities will allow you to set up a budget plan that’s tied to the previous year’s consumption. For those bills that might vary over time, you’ll want to set up a line in your budget for each. Restaurant spending, vacation spending and food expenses will fall into this category. It’s important to avoid spending more than your budget allows so that you can stay out of debt. When expenses exceed your income, going into debt is the only way to make it seem as though ends meet.
Budget for Savings
You’ll avoid debt if you can ensure that your expenses never exceed your income. However, if there is no gap between the two each month, you’ll never be able to build wealth. After setting up your budget, you’ll want to cut back on as many expenses as possible. This should build a gap between your income and your expenses. This gap should go toward savings. First, you’ll want to save up a few months of expenses for emergencies. Then, you’ll want to save for the long run. Pushing this excess income into investments is a sure way to build wealth over time. As the percentage of your income going into savings grows, you’ll speed your trip toward a comfortable retirement.