Do you budget your salary as part of your financial planning?
It’s something most of us have faced at one time or another in our lives — we get paid, we pay the bills, buy groceries and still find ourselves using change from the couch cushions to feed ourselves those last days before the next check comes in.
Learning to budget your salary can help save you from these stressful and sometimes embarrassing lapses. Here are some tips and tricks to help you write that first budget and stick to it in the long run.
Separating Needs and Wants
Before you start looking at numbers and calculating your salary, you need to learn how to separate needs from wants. You might feel like you need a new pair of headphones or a pizza, but are these things you can’t live without? Figure out your needs, which should include things like:
- Utility bills — power, internet, phone, water
- Insurance — health, auto, life
Everything else, from travel to designer clothing to your morning Starbucks coffee, falls into the wants category — things you desire but could live without.
Some things might seem like they belong in both categories. You might need a car to get to work, but you don’t require a high-end Tesla or another expensive new vehicle. Buy as inexpensive a beater as you can stand — especially if you work on cars and won’t need to pay a mechanic to fix the things that inevitably break.
Once you start sticking to your budget and saving money, you’ll be able to splurge on a nicer car. Apply that logic to anything that seems to overlap between the needs and wants categories.
If you have any major expenditures coming up in the next year, make sure you sort these into needs or wants. If you’re planning on going back to school in the next 12 months, start figuring out how those expenses — tuition, books, supplies, etc. — will fit into your budget.
Open a Savings Account
Step two is to head to your local bank and open a savings account. This will become important later, but it’s better to have an account open and established before you start trying to budget your entire salary. This might seem challenging, especially if you’re living paycheck to paycheck because you do need to make a minimum deposit to open the account in most cases.
Take the time to talk to a banker and find out what the best available options are for you. This is the best person to have in your corner, especially if you’re working on financial planning for your salary.
Having a savings account gives you a nest egg you can tap into in an emergency, or a retirement fund once you’re finally ready to leave the workforce. Everyone should have an emergency fund or savings account to fall back on.
Writing Your Budget
Step three is probably the hardest part of this entire endeavor — sitting down and writing out your budget. Start by figuring out your net income and your total expenses for the month. Include everything you spend money on, from bills to your morning coffee.
Once you know how much money is coming in and how much is going out, it’s easier to start setting goals. If you have debt, like many of us do, make a plan to repay it as part of your budget. There are a lot of different ways you can set up your budget, but our favorite is one of the simplest — the 50/30/20 plan.
The plan breaks down like this: You spend 50% of your income in your needs, 30% on wants and 20% goes into savings from every paycheck. With this in mind, if you bring home $2,000 after taxes every month, $1,000 should go to your needs, $400 should go into savings or debt repayment, and you’ll have $600 for wants.
Practice, Practice, Practice
Writing a budget is probably the best thing you can do for yourself when it comes to making smart financial decisions, but it isn’t always the easiest task. Be patient with yourself. Remember — practice makes perfect, and financial planning with your salary is the best thing you can do to make living a little bit easier.
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