Learning how to live on a budget is something many people face for the first time when they graduate from college or enter into the adult world of full time jobs and apartment leases. It can be overwhelming, but learning early how to live on a budget can be one of your most valuable life skills.
Knowledge is Power
Though “living on a budget” is often shorthand for “living without a lot of money,” it’s important to consider what the term actually means. A budget is simply a plan for earning and spending money in a balanced way. If you are working with a smaller income budgeting can require some creativity and delayed gratification, but a good budget will provide more opportunities than limits in the long run.
The first step is figuring out exactly how much money you have coming in (income) and how much you have going out (expenses). There are online programs, such as Mint.com, that can help you with this, but it’s also possible to tally these things up on your own.
Of the two, income is often the easier number to pin down. Income is the amount of money you are earning. If you work an irregular schedule, it’s best to take an average of three to four months to find a limit on your budget.
Next, look at expenses. List out everything you must spend money on in every given month, including housing, transportation, food, debt and emergency savings. These are the core expenses that your budget needs to accommodate. If it does not, you’ll need to consider one of two things: increasing your income or decreasing costs. Things like moving in with a roommate or taking on a second income generating project can be good ways to achieve this. Making sure your income matches the core expenses is the main component of living on a budget.
If you have money left over after covering necessary expenses, you are free to allocate it to other areas of your budget. Going to movies, dining out with friends and saving for larger special purchases will all come from this second category of expenses.
Look Forward and Set Goals
It’s important to remember that a budget is not about past financial choices as much as it is about what you can do going forward. Even though debts are a key factor when making a budget, in all other respects budgets look forward, often to a time when you’ve paid off your debts. There is a lot of advice on how to create a detailed budget, with sites like You Need a Budget offering popular tips and methods. But the key idea when living on a budget is that you want it to fit your life, not only fitting your life to your budget.
When you take the time to track your income and your essential expenses, it also becomes easier to see how much money you have left over to put towards savings. Savings are an important aspect in any budget. Not only do they provide an emergency fund, but they also provide a way to make progress toward financial goals. These goals may be long-term, such as putting money into retirement accounts or shorter-term goals such as saving for a vacation. Knowing how much you are able to save and working that into your expenses allows your budget to encompass both your monthly plans and your future goals. After all, you may not go on a vacation every month, but it should be a part of your budget well before it happens.
Living on a budget does take practice, and time dedicated to tracking income and expenses. But working to make it meet your goals and lifestyle will ensure you are on track to a stable financial future.