The Basics of Budgeting
With inflation high, food costs rising, and prices for everything from entertainment to dinner out all going up, most of us feel like our paychecks aren’t doing as much for us as they once did. Fortunately, there is a solution. By mastering the basics of budgeting, you can gain greater clarity about what you can afford and get more control over how you spend your money. Look, we get it, budgeting isn’t the kind of topic that necessarily makes you want to get up and dance, but if you take the time to create a budget, not only will you know how much money you have available to go dancing, but you’ll have more peace of mind the morning after the party.
The best part of budgeting is that it is relatively simple because of a simple key rule. What is it?
The key rule of budgeting:
Spend less than you earn.
Easier said than done, you say. We get it. With prices going up, you might find that you can’t maintain your old habits and still have money left over at the end of the month.
Budgeting means acting and taking control of your financial narrative. With a few simple actions you can take each month, you can get yourself on the path to creating, and sticking to, a budget. Here are certain key actions you need to take to begin budgeting today:
Go on a Fact-Finding Mission
When it comes to budgeting, knowledge is power. The first step to creating a budget is to sit down and write down how much money you make each month. This might be money you receive through your paycheck, scholarship, allowance, child support, gift money, or other sources. If you are a freelancer or contractor, keep in mind that your income may not include deductions for taxes, so you may want to speak to a tax advisor who can help you understand your actual income.
Next you need to write down the expenses you can’t avoid no matter what. These expenses might include rent, utilities, food costs, and transportation expenses. The last step is the most important. You’ll write down the things you spend your money on for fun, like dinner out with friends, new clothes, or coffee out. If you have a checking account with Ponce Bank, you can simply go online and look at a line-item record of your monthly expenses or come into your neighborhood bank and ask for a record of your expenses over the last month. If you don’t have a checking account, you can still track your money!
Keep a notebook and write down your expenses for a couple of months. If you use a credit card, ask for a credit card statement, or look at your statement when it comes in the mail. Little expenses can add up. Even if you only spend $2 a day on a coffee at the bodega, that could add up to as much as $62 a month. (And if you’re going for the $5 fancy lattes every day, that’s as much as $155 a month).
Set your Intentions
Once you subtract the expenses you can’t avoid no matter what from the money coming in, you’ll know how much money you have to spend on your wants—or the money left over after you’ve paid your bills, bought food, and covered transportation. Now that you know how much you have left over to spend, it’s important to get intentional and realistic. Are you spending more than you have? Do you have credit card debt or student loans that need to be paid off (if you do, these expenses need to be added into the expenses you cannot avoid no matter what category). How much are you really spending on dinner out, delivery, and late-night Ubers? Again, self-awareness is the first step to change, and the first step to growth. Knowing where your money is going right now can help you get more intentional about how you spend your discretionary income and track where you might need to change your habits.
Plan to Save
While it might be tempting to take all your discretionary income and spend it all on fun things every month, it is also important to save. There are many good reasons to start saving money today. Savings can prepare you for unexpected expenses (like a lost job or unexpected medical bill), can help protect you from racking up expensive credit card debt, and give you peace of mind.
Set Realistic Goals
If you have credit card debt, maybe your goal is to reduce your balance to zero within the next few years. If you don’t have emergency savings, perhaps your goal is to set up a savings account and eventually have enough money in it to cover three months’ living expenses. Perhaps you also have more long-term goals like saving for your children’s college education or retirement. At Ponce Bank, we can chat with you and help you plan to meet these goals. But the foundation to meeting any financial goal is having a budget and sticking to it.
When thinking about your budget, it’s best to think of your money as falling into two categories: “needs” and “wants.” Needs are expenses you can’t change, things like rent, utilities, groceries, your MetroCard. It isn’t always easy to change how much you pay on rent or reduce your grocery bill (though you can always look at whether you’re shopping at specialty grocery stores, or stores known to offer more sales and value). The best place to save money is in how you spend your income on your “wants.” These are things like dinners out with friends, movies, new clothes, or late-night Uber rides. Taking a close look at how you’re spending and considering less expensive alternatives might be your first step to financial freedom. Here are some examples:
- Love to buy new clothes? Maybe try thrifting instead. Not only will you save money, but you’ll be reducing clothing waste, your carbon footprint, and if you shop at a place like Housing Works or Salvation Army, you’ll also be supporting a good cause.
- Like to go to the movies? Maybe invest in a home projector and popcorn maker and turn a night inside into an experience.
- Buy your coffee on the go? Wake up 15 minutes earlier, brew your own coffee, and turn your daily home pour over into a moment to pause, meditate, contemplate, and prepare for your day.
- Nights out with friends leaving you with Uber bills and big bar tabs? Try inviting friends over for dinner instead; and if things go late—turn it into a slumber party!
- Uber bills giving you a financial headache? Invest in a bike, cut out the soul cycle bill, and experience an environmentally friendly way to get around town.
And these ideas are just the beginning. A budget that works for you is the first step to taking control of your financial life. Yes, it takes work. Yes, it takes discipline. But the rewards are immense. You’ll have more peace of mind. You’ll know where your money is going. And best of all, you’ll be in the driver’s seat and on the way to achieving your financial goals. When you have savings, you have more options: whether that’s travel, going back to school, starting a new business, or quitting that job and starting a new one.
One of the best ways to begin budgeting is to open a checking account and savings account. Having a checking account from which all your bills are paid, and paying for things with your debit card is a convenient way to track your spending. With online banking there’s a clear record of your expenses and purchases. At Ponce Bank we have a range of savings solutions and checking solutions designed to meet a wide range of financial needs. Come into your neighborhood bank today to learn more!
Please note that this blog is provided for general informational purposes only. Some of the information may not be applicable or appropriate for all people, and the information is subject to change. You should consult with appropriate advisors to determine what is best for your individual situation.