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
Creating a budget is basically establishing a cash flow 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.
Divide your expenses into two categories.
A simple way to look at your expenses is to separate them into non-discretionary (your needs) and discretionary (your wants) categories.
- Nondiscretionary expenses are the “must-haves,” such as your mortgage or rent, groceries, transportation, insurance premiums, and taxes. Make sure to include debt payments such as credit cards and auto loans. Include your savings and investing goals as line items in your nondiscretionary category (for example, rainy day fund, retirement savings, college expenses, or health care costs).
- Discretionary expenses are the “nice to have,” the extras such as dining out, streaming services, entertainment, travel, and clothing.
And don’t forget to allocate money for expenses that come periodically throughout the year, such as insurance premiums and real estate taxes. It’s can be easy to forget when creating a monthly budget.
List your sources of income.
How do you make money? Where is your money coming from? 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.
Step 2: Create
It’s now time put some real numbers into your budget. Tally up your income, itemize your expenses, and do the math.
Have enough? Prioritize.
In order to reach your goals, you’re going to have to prioritize. For example, can you reduce expenses like cutting back on subscription services or negotiating bills? Ask yourself questions like: is public transportation a cheaper option? can you refinance your mortgage or car loan?
It’s important to calculate your expenses. Make choices so your income matches your expenses and goals. Understand you may have to change your spending to meet your income.
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 spend tracking app to help you. Tracking how you’re spending your money daily with alerts and categorization can open your eyes to what other changes are needed.
Track your spending for the next 30 days. Does your spending projections match the money you’ve spent? You might find making some lifestyle and spending choices can impact how much money is spent monthly. Identify the changes you’ve made that’s keeping you on budget. Then, ask yourself about the other changes you need (make more money or eliminate more expenses) to help you meet long-term goals.