Good day everyone, and welcome back to our Financial Wellness Seminar. We’ve touched on why budgeting is important, and today we’ll get into the nuts and bolts of how to create a personal or family budget.
Creating a budget might seem daunting at first, but remember, it’s your financial roadmap, personalized to fit your lifestyle, income, and goals. Let’s walk through the steps together.
Step 1: Determine Your After-Tax Income
The first step in budgeting is understanding your income. This is not just your salary but any other sources of income you might have, like bonuses, rental income, income from a side job, etc. After-tax income is what you take home after all deductions. This is the amount of money you have to work with.
Consider Mark, a software engineer. Besides his salary, he earns additional income through freelance projects and rental income from a property he owns. All of these contribute to his after-tax income.
Step 2: Identify Your Expenses
Next, you need to identify where your money goes. Start by listing all your fixed expenses, like rent/mortgage, utilities, and loan payments. Don’t forget semi-annual or annual expenses like insurance premiums or property taxes.
Then list your variable expenses like groceries, dining out, entertainment, and personal care. These can change from month to month.
Remember Mia, a single mother we discussed earlier? When she sat down to list her expenses, she was surprised at how much she was spending on dining out and decided to reduce that expense.
Step 3: Set Your Financial Goals
Now that you have a clear picture of your income and expenses, it’s time to revisit those SMART financial goals we set earlier. Are you saving for a down payment on a house, your children’s education, or an emergency fund? How much money do you need to allocate to these goals each month?
Let’s think of Jake, a young professional with the goal of going back to graduate school. By setting this as a financial goal, he ensured a part of his budget was dedicated to saving for tuition fees.
Step 4: Design Your Budget
Now, the actual budgeting begins. Allocate portions of your income to different categories. A popular method is the 50/30/20 rule: 50% of your income goes to needs, 30% to wants, and 20% to savings and debt repayment. However, these percentages can be adjusted based on your personal circumstances and goals.
Consider Lisa and Bob, a young couple planning to start a family. They adjusted their budget allocations to save more for future family expenses, thus spending less on their current wants.
Step 5: Implement Your Budget
It’s now time to put your budget into action. Remember, a budget is not a set-in-stone document but a living, breathing one that changes as your circumstances do. Keep track of your spending to ensure it aligns with your budget.
Take the case of Chris, a solo parent. He kept a close eye on his spending when he started his budget, ensuring he was not overspending in any categories.
Step 6: Review and Adjust Your Budget Regularly
Life changes and your budget should too. Regularly reviewing your budget helps you make necessary adjustments and stay on track toward your financial goals.
Let’s think of Emma, who recently received a promotion with a salary increase. She took this opportunity to review and adjust her budget, deciding to allocate the extra income towards her retirement savings.
Creating a personal or family budget helps align your spending with your income and financial goals. It’s a financial habit that builds a strong foundation for financial wellness. Remember, the key to a successful budget is consistency and flexibility.
In our next session, we’ll discuss how to stick to your budget and common budgeting mistakes to avoid. Until then, start working on creating your budget. Thank you, and see you at the next session!