Where to start with budgeting

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Budgeting Step #1: Evaluate your income

The first step to setting a budget actually has nothing to do with your expenses. Income sets the maximum amount your expenses can be. Ideally your expenses are a good bit lower than your income. If you aren’t there I’m confident can you be soon.

Budgeting Step #2: Plan Your spending

After you know your income you can move onto the next step which is related to your expenses. While you could dig into past months to determine what your spending looks like I don’t believe that would be a good use of your time in the long run.

Instead, try and plan your spending for next month. Break your spending into different categories. Use your gut on how many categories is reasonable.

I’d lean toward starting with too many as this will provide the most insight into your spending. As you move down your personal finance path you could always simplify these categories.

Budgeting Step #3: Determine the gap

The final step is to compare your income and expenses. If there is a sizeable gap between the two (income greater than expenses) then I’d just live out the month and see what this gap looks like after you’ve actually spent the money.

If that gap you are starting out with is tight, or even negative, I’d keep a close eye on your expenses as you move through the month.

If I could choose a single focus for you and your personal finance journey it would be to grow that gap as much as possible. Not immediately, but over time.

Here is another trick or two that I’ve learned to help with budgeting issues I’ve learned in the past.

Oh and keep in mind that there are several different types of budgets. Start with the most basic one described above but know you can always tweak your process to accommodate you and your lifestyle.

The missing piece of the puzzle is how you are going to actually track, categorize and total your expenses throughout the month.


This entry was posted on Friday, December 3rd, 2021 at 10:00 am. Both comments and pings are currently closed.