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The 3 Step Budget: A Simple Budgeting Process

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A Gallup poll found only “32 percent of Americans prepare a monthly budget.” This means many people live each month without a spending plan or a guide for their money. And without a budget, you can find yourself living a more stressful financial life.

We continue to hear from experts share importance of budgeting. But how can you actually start a budget that’s simple and easy?

The 3 step budget is a simple and easy way to budgeting your money to achieve your goals.

A budget is a plan that helps you keep track of how much you earn (your income) and how much you spend (your expenses). It’s a very important tool for understanding how to manage your money because it clarifies exactly where your money is going.

The budget can also help you figure out how much you can save and invest. To get started, follow these three budgeting steps:

Step 1: Plan

Budgeting involves identifying your income and determining spending priorities. It lets you know how much you can spend each month—and how much you can save.

Determine what you’re spending on

What are you spending on? Your expenses might include:

  • cost of housing (mortgage/rent)
  • utilities (water, electric, gas)
  • subscriptions (cell service, streaming services)
  • insurance (auto, home, life, renters, pet)
  • dining and entertainment
  • groceries and household supplies
  • home and car maintenance
  • transportation (car payments, fuel cost, tolls, tickets, public trans)
  • healthcare (copays, OTC medicine, prescriptions)
  • the expense of paying yourself first (which you must do)

How to calculate your monthly expenses

  1. Gather your financial statements. These documents include bills, banking and mortgage statements, and other financial account statements that can help you see exactly where your money is going.
  2. Look for charges you make regularly. This can help you determine your largest expenses.
  3. Create a list of monthly expenses. Includes your recurring living expenses, such as your rent or mortgage, utilities, and car payments. It also includes variable expenses like groceries and discretionary expenses like clothes.
    • What are your obligations to creditors and family or friends from whom you borrowed money? Those payments are expenses, too. Think credit cards, personal loans, and any other loan you didn’t include in living expenses, such as mortgage payments, car payments, and other debt.
  4. Examine your expenses. To find patterns in your spending, try organizing your purchases in an expense worksheet. Start to distinguish between different types of expenses. Consider separating your expenses into the following three categories: fixed, variable, and discretionary.

List your income sources

How do you make money? Regular wages from an employer are most likely your primary source of income. However, don’t forget to add other income sources such as bonuses, gifts, income from rental property, interest or investment income, government checks, or any other source.

Some common income sources include:

  • Wages, salaries, and tips: The money you earn at your job. When calculating your net income from wages and salaries, be sure to deduct any 401(k) contributions you choose to make.
  • Interest and dividends: Money earned from your bank accounts, such as savings accounts and certificates of deposit (CDs). Dividends may be received if you hold stock in a company.
  • Rental income: The total amount of money received for rent after expenses for the property have been paid.
  • Social Security: Social Security benefits include the amount paid to retirees who contributed during their working years, as well as amounts paid to surviving spouses and disabled workers.
  • Miscellaneous income: Income that includes unemployment compensation, winnings from gambling, gifts received, or money taken from an IRA, 401(k), or pension.

Take the list you started and add the amounts together to get your monthly income, including all income sources.

When calculating your budget, it’s best to use net income–money you get after payroll taxes and deductions.

Step 2: Create

It’s now time to put some real numbers into your budget. Tally up your income and expenses, and do the math.

Subtract your monthly expenses with your monthly income to calculate your cash flow.

Total Monthly Income – Total Expenses = Cash Flow

Cash flow helps you see if you’re spending at, above or below your means.

  • If your cash flow is positive, you are doing well and may have extra money to put towards savings, investing, and debt payoff.
  • If your cash flow is negative, it may mean you’re struggling and experiencing stress. It’s time to cut expenses and increase income.

Do you have enough?

In order to reach your goals, you’re going to have to prioritize. Can you reduce expenses? Consider cutting back on subscription services. Start negotiating with providers and creditors to lower your bills.

Ask yourself questions like: Is public transportation a cheaper option? Do I really need to spend on this? Can I refinance my mortgage or car to a lower payment?

Learn the best ways to lower monthly expenses.

Step 3: Track

Creating a budget is just the beginning. Your budget is a living document that needs to be tracked and updated. What’s often the hardest part is sticking to a budget which is the key to reaching your goals.

Once you’ve completed the 3 step budget, it’s important to monitor your progress and use a expenses tracking apps. Tracking your spending opens your eyes to what other changes are needed.

Find budgeting apps in the marketplace to make your life easier.

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