What is a budget?
Think of a budget as a map with clear directions detailing how you can reach your financial destination. A budget gives you a clear plan to live within your means, not overspend and achieve goals. “Budgeting gives you the freedom to say 'yes' to things that matter and 'no' to things that don’t help you reach your goals,” says Whitney Hansen, a money coach based in Boise, ID. “Most people view budgets as restrictive, but they are actually empowering."
Learning to live within a budget can require a little shift in thinking because "by saying yes to something you are saying no to something else," she acknowledges. But instead of focusing on all the things you can't buy, Hansen suggests focusing on what you are saying yes to.
"By getting your finances in order, you are saying yes to financial security, peace of mind and things that are directly in line with your values. Sometimes we just have to remind ourselves of that," she says.
Map out the numbers
The first step in creating a realistic budget is having a clear picture of your income and how you spend it. A spreadsheet is a handy tool (digital or analog) for accomplishing this. First, add up your monthly take-home income from all your sources — regular salary, freelance, side hustle or some combination — and calculate your monthly average.
Now that you know what income you have to draw from, start to track your spending. Use a pen and paper (get creative with a bullet journal) or online tools such as Mint.com or PersonalCapital.com. Whichever you choose, you’ll want to sort your spending into “buckets” such as mortgage or rent, utilities, car payment, internet, insurance, food, gas, entertainment and so on. Breaking down your spending into categories can help you make adjustments to your spending.