Budgeting Basics

- Identifying Your Income
The first step to creating a budget is to figure out what your income is and where it is coming from. You will want to begin by writing down any income you receive. This can include income from a job, social security, child support, side gigs, or anything else that regularly brings in money.

- Net vs. Gross Income
One thing to determine when making a budget is whether to use your net income or your gross income.

Net income is your income after deductions (taxes, 401(k), health insurance,etc).

Gross income is the income you make before any deductions.

You will want to determine whether to use your gross or net income in your budgeting, but it is most common to use your net income. This is because budgets are there to help us understand what we can afford. You can't use the money that was deducted for taxes to pay your electric bill, so net income can help give a more accurate representation of your usable income. If you use your net income, you will want to make sure you don't double count any of your expenses that are automatically deducted from your income, like health insurance. If you use your gross income, you will need to remember to deduct out taxes, health insurance, etc.

- Income Tip
Underestimate your income. By underestimating your income, you may find that you will wind up with a surplus of funds!

- Identifying Your Expenses
The next step in creating your budget is to identify all of your expenses. This will include your major expenses, like rent, car payment, electric bill, etc, but will also need to include your living expenses, such as gas and food. Make a list of all of your monthly expenses as well as the cost for each expense.

- Fixed vs. Variable Expenses
When dealing with your expenses, there are two kinds: Fixed and Variable.

Fixed expenses are expenses that do not change from month to month. These would be items like your rent and your car payment that have a set amount you pay each month.

Variable expenses are expenses that change each time you pay them. These would be expenses such as your groceries, your gas, dining out, etc.

It is important to remember that fixed expenses typically come with a reminder that they need to be paid, and are easy to budget for as they don't change. Variable expenses sometimes don't come with a reminder to pay them and require you to keep track of them to make sure you don't overspend.

- Expenses Tips
Overestimate your expenses. By overestimating your expenses, you help provide yourself with a cushion that will prepare you if the cost of one of your expenses goes up.

Choose a method to track your spending. There are many apps that help you track your spending and your bills, but you can even do it in a notebook. Decide which option will work best for you.

- Emergency Funds
An emergency fund is a savings account that is specifically for any unplanned expenses or financial emergencies. This can include things like car repairs, medical bills, or a loss of your job. Emergency funds are important to have so that when a financial setback occurs, you aren't left scrambling trying to figure out how to pay for the emergency.

Knowing how much to set aside for an emergency fund can be tricky, and it varies from person to person. To start, try thinking of some unexpected expenses you've had come up in the past and how much those have cost you. This is a good place to start.

Financial experts suggest saving three to six months worth of living expenses saved in an emergency fund, but we understand that that can be a challenge to do, especially if you're living paycheck to paycheck or have a variable income. It is important to remember that even setting aside an amount as small as $5 a week can help provide you with a sense of financial security.

- Treat Savings Like a Bill
One effective way to help you build your savings account is to treat it as though it is a bill that you have to pay. This is sometimes referred to as the "Pay-Yourself-First" method. When listing out your expenses, add savings to the list with an amount that is comfortable for you. Set up automatic transfers to set money aside into your savings account. This is a helpful way to stay on top of building your savings account.

- Savings Tips
When you have paid off a debt, transfer that same payment amount into your savings account. This will help you build your savings.

- What is a Need?
We likely have all seen something in the store or online and gone "I NEED IT," but there's a high chance it's probably just something you really want. A need is something that is required to live. This can include food, clothing, and housing.

When creating a budget, it is important to be able to identity your expenses that fall under the needs category. These are likely bills that you won't be able to cut out if you ever had to and are important to put at the top of your priority list for bills that need to be paid.

- What is a Want?
A want is something that helps improve your quality of life, but is not necessary to live. That is not to say that wants are not important in creating a sustainable budget. It is important to budget for your wants, but equally important to try to stick to the budgeted amount for them. (Yes it is perfectly acceptable to have a Starbucks allowance as long as it works for you!)

When budgeting for wants, you will want to use the income that is left over after your needs and your savings have been taken care of.

- Needs vs. Wants Tips
If you're not sure if something falls under the needs or wants category, ask yourself these questions:
Do I really need this item to live?
Is it possible to get this cheaper?
Would my life be different if I didn't have this?

Review your lists. Some things that we may have on our wants or needs list can be replaced by cheaper options or cut out all together. Sometimes we have items on our list that are there solely for the status symbol or because of peer pressure. Get into the habit of reviewing your needs and wants and removing anything that doesn't truly add value to your life.

- Make Adjustments
Budgets can take a while to nail down, and will require adjustments as you go. It is important to review your budget every month or two to track how well it is working out for you. Are your expenses out-weighing your income? Did the amount of a bill increase? Did you get a raise? It is best if you carve out a chunk of time to review your budget and get in the habit of checking it over for any changes.

- Get a Record Keeping System
There are a wide variety of ways that you can keep track of your income and expenses. You can find a budgeting app in your app store, or you can simply write it down in a notebook. Mess around with a few different tactics for keeping track of your budget and find out what works best for you.

- Tips to Stay on Target
Consider opening a separate account solely for paying your bills. This will help you keep your spending money and your bill money separate so you don't end up over spending and wind up not having money for your important bills.

Don't rely solely on your online banking app. While keeping track of your purchases in your online banking app can be helpful, remember that it may not always show pending transactions or bills that will need to be paid in a couple days. This is why it is important to know which bills are coming up and set money aside for them.