How To Create a Budget
Creating and maintaining a budget is much easier said than done. Many people understand the value of having a budget but have no idea where to start or what to do with their finances.
First, let’s look at the different types of income: gross income and net income. Gross income is your total income without deductions like taxes or health benefits. Net income is your gross income minus deductions. Your net income is what you have leftover to save and spend – also called take home pay.
Make a list of all your income. This can help you plan how to save and spend it. Next, track your expenses. Spend a few weeks paying attention to where your money is going every day/week. Tracking your expenses helps you understand if you are using your money in line with your values and goals. It can also help you figure out where you can make changes and spend less.
To make compiling this list and tracking your expenses easier, if you're a First Guaranty Bank customer, sign up for online banking and use our new Personal Finance Manager. Learn more about our PFM here.
Needs vs. Wants
Now that you are tracking your expenses, it can be helpful to think about them in three different ways: needs, wants, and obligations.
- Needs are things you must have to live (food, shelter, etc.)
- Wants: things you desire, but can live without (a latte from your favorite coffee shop, the newest scarf in a boutique, etc.)
- Obligations: debts you owe because you borrowed money, made some kind of agreement to pay them, or were ordered to make them (loans, rental agreements, child support, etc)
It’s important to note that everyone’s needs and wants are different. Practice asking yourself if what you are about to purchase or spend money on is truly a want or a need—sometimes, you may have to make some difficult decisions.
Plan and Manage Your Expenses
Once you have a good idea of where your money goes each day/week/month, track it and create a plan. The good news is, you don’t need anything fancy to help you with this step—it can be as simple as inputting due dates for bills on your calendar, using online bill pay, or creating a spreadsheets of your monthly expenses and income.
Compare your net income to your total expenses. Does your income cover your expenses? When you do the math here, if you get a positive number, your income more than covers your expenses. If you have a negative number, you will need to increase your income or decrease your expenses.
Use our FREE Spending and Saving Plan to examine your current spending and saving habits and to plan for the future. Download it here.
For more information on budgeting, watch the video below: