How to create your first budget
Last updated: January 1
Whether you recently received your first paycheck or you've been working for a while, learning to manage your money can be one of the best decisions you make for yourself. Budgeting can be complex, especially once you start to think about things like saving for a down payment on a home, putting money away for retirement and paying for insurance. Taking the time to establish a budget is a good way to get started.
Here are a few tips to help you create your first budget and make financial decisions that will help keep you on track.
1. Review your current spending
Start by reviewing your recent bank and credit card statements to evaluate your monthly expenses and income. It may be helpful to track everything you are spending money on each day so you can figure out where you can cut costs, says the Consumer Financial Protection Bureau. For example, you may not think that $3 latte costs a lot, but $3 a day for 365 days adds up to more than $1,000 a year. By keeping track of what you're spending, you can see how even those little purchases may be affecting your budget (and bank account) over time.
2. Consider using a 50-20-30 budget
When creating your first budget, Forbes suggests using the 50-20-30 Rule, which is a three category budget. First, designate 50 percent of your income to essential spending, like rent, utilities and bills. Next, allocate 20 percent of your income for financial goals, such as saving, paying down debt and investing. The remaining 30 percent can be used for discretionary spending, such as dining out, vacations and other nonessential expenses.
Remember that these percentages are the maximum you should spend in each category, says Forbes. If you can stay under budget, you may have more money to put toward your goals. Also, keep in mind that the 50-20-30 budget is just one plan. You can adjust it to fit your specific needs, or follow another plan that works for you.
3. Focus on saving
Saving money for a rainy day and for the long term are key parts of successful budgeting. It's a good idea to have an emergency fund to deal with life's unexpected expenses, such as car repairs or medical bills. The Balance recommends having three to six months' worth of expenses saved.
Also, while retirement may be decades away, it's a good idea to start saving as early as possible. Entrepreneur magazine recommends you start in your 20s by saving between 10 and 15 percent of your income in a retirement account. (You can then work up to putting 20 percent into your retirement fund.) DaveRamsey.com says investing through your retirement plan at work can be an easy way to start putting money aside, especially if your employer makes matching contributions. You may even be able to have these contributions automatically deducted from your paycheck.
4. Pay off your debt
Whether it's credit card debt or college loans, interest on the money you owe can accumulate quickly and add to your debt. Paying off your debt should be one of your first priorities. Lowering and eventually eliminating your debt may help increase your financial security, improve your credit score and hopefully reduce some stress in your life, says The Balance.
5. Use online tools and apps
From online banking to budgeting apps, there are a lot of tools that can help make managing your finances easier. Forbes notes that some of these programs can connect to your bank accounts and provide updates and alerts regarding your spending.
Setting and staying on a budget doesn't have to be overwhelming. By establishing good financial habits, you can help keep your finances on track.