5 Steps to Building a Better Budget

Taking charge of your finances isn’t just about money – it’s about your overall well-being. A recent report by the American Psychological Association found that 66% of Americans consider money a significant source of stress. This highlights the importance of effective budgeting.

If you want to manage your finances more effectively and avoid feeling financially strained, mastering the art of budgeting is important. We will explore the 5 basic steps to budgeting along with budgeting tips in this article. Let’s get started.

1. Assess Your Current Spending

Keep an eye on your spending to understand where most of your money goes. Take a look at your expenses from the past couple of months to get a clearer picture. You can use Bank of South Texas’ mobile banking feature to generate your bank statement within a few taps. This will help you see if there are any spending habits you might want to change.

Go through your bank statements and track your expenses using a worksheet or a budgeting app to organize everything. Forbes recently released a list of the best budgeting apps, covering some nice picks, including GoodBudget, Stash, and PocketGuard.

Make a list of all your expenses, like mortgages, loans, rent, insurance, utilities, internet, gas, phone bills, cable, travel, groceries, childcare, and transportation. You can categorize these expenses into three basic groups to make tracking easier and see where you can make adjustments.

These three categories include:

• Fixed expenses: For some expenses, the costs are fixed every month. Such expenses include rent, mortgages, insurance, loan repayments, etc. These expenses are generally the ones that you will have to bear month-on-month.
• Variable expenses: There is a small window in variable expenses that you can cut down slightly wherever possible. Variable expenses would include household and car maintenance, shopping, and groceries.
• Discretionary expenses: Discretionary expenses are the ones you include to maintain and improve your lifestyle. These expenses include dining out, gym membership, travel, etc. Such expenses are not necessarily something you cannot do without but are something that you want to spend on. Based on your budget, you can increase or decrease these expenses.

2. Set Financial Goals

Start by thinking about your financial goals. What do you want to achieve with your money? It could be buying a house, paying off a student loan, going on a vacation, or even planning for retirement.

For each goal, set a target amount of money you’ll need. For example, if you’re saving for a house, figure out how much you need to save for a down payment. If you’re paying off a student loan, calculate the monthly payment you can afford.

Planning a vacation? Estimate the total cost and how much you need to save each month to make it happen.

And when it comes to retirement, think about how much you’ll need to cover your daily expenses. Don’t forget to set aside money for emergencies, too.

By setting clear financial goals and targets, you can budget effectively without feeling overwhelmed.

3. Create a Budget Based on Income

Creating realistic budgets and financial goals is important to avoid wasting time and energy. Your budget should be based on your actual income to ensure it’s achievable. Balancing your income and expenses is key to optimizing your budget.

Start by estimating your income. Calculate your fixed income, such as your salary, and any additional income from side hustles or other sources. If your income varies, use the lowest amount you’ve earned in recent months to be conservative in your calculations.

Identify your main sources of income for the month and adjust for any additional or irregular income. Having a clear understanding of your income is crucial before setting financial goals or making financial commitments.

By accurately accounting for your income, you can increase your chances of achieving your financial goals without encountering unexpected obstacles.

4. Track Expenses and Make Adjustments Wherever Needed

It’s important to track your expenses regularly, not just to create a budget but also to ensure you’re sticking to it. Flexibility is key—make adjustments to your plan as needed to avoid overspending in any given month.

PayPal recommends tracking the expenses against these categories:

• Mortgage
• Utilities
• Rent
• Taxes and fees
• Groceries
• Childcare
• Medication
• Child support
• Clothing and toiletries
• Transportation
• Loans
• Restaurants and food
• Travel
• Credit card payments
• Savings and emergency funds
• Recurring subscriptions

Differentiate between your ‘wants’ and ‘needs.’ If you find yourself overspending on something you merely ‘want,’ consider postponing it to stay on track with your financial goals.

Understanding your spending habits is an important budgeting tip. Evaluate if something listed as a ‘need’ is truly essential or if it’s something you simply ‘want.’ When adjusting your budget, start by reevaluating your ‘wants,’ and then move on to your ‘needs.’ Finally, consider if there’s room to adjust your fixed expenses to help balance any budget deficits.

5. Regularly Review and Adapt

Once you’ve outlined your income, expenses, and financial goals and set your budget, the next step is to follow it diligently and review it regularly. Regularly reviewing your spending, income, and savings is crucial to staying on track with your budget.

While it might seem easy at first, sticking to your budget and making necessary adjustments can be challenging. However, it’s a practice that will prove to be effective in the long run. As your financial situation changes—whether you receive a raise, experience changes in expenses, or set new financial goals — it’s important to adapt your budget accordingly.

By regularly reviewing and adjusting your budget to meet your evolving needs, you can optimize your finances and work towards financial freedom. Stay proactive and make the necessary changes to balance your income and expenses effectively.

More Budgeting Tips

Here are some tips to optimize your budget:

• List your ‘wants’ and your ‘needs’ separately.
• Take note of your small expenses. These small expenses may add up to bite in your back if not managed right.
• Be vigilant of your lifestyle choices.
• Utilize cash more than you use credit. It will help you keep a hold on your spending and stop you from any unnecessary expenses.
• Prioritize and consolidate your debts. Debt consolidation can help you reduce your overall interest rates and prevent you from leaking money.
• You can follow the 50/30/20 rule, where you have 50 percent of your income for your needs, 30 percent for your wants, and save the remaining 20 percent.

Start Budgeting Now!

It is quite evident how important building a budget can be. Follow the five steps mentioned above to create a better budget, analyze and readjust your expenses, and streamline your finances.

Proper budgeting will help you build a corpus of savings regardless of your income band. While you are budgeting, Bank of South Texas urges all its customers to stay safe online.

For any information related to banking services, contact us today.