“Effective Budgeting: Strategies to Achieve Your Financial Goals”

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Creating a Budget: A Step-by-Step Guide

Making a budget is one of the best ways to understand where your money goes every month and what changes you could make to help you reach your financial goals. At O1ne Mortgage, we believe in empowering you with the knowledge to manage your finances effectively. Call us at 213-732-3074 for any mortgage service needs.

1. Determine Your Income

If you get paid monthly or twice a month, this step is straightforward because you’re earning the same amount every month. If you’re paid weekly or biweekly, you may earn more in some months than in others. In such cases, adjust your budget each month based on how many paychecks you’re expecting. For those who are self-employed or have fluctuating wages, calculate your average income for the past three to six months. Focus on your take-home pay instead of your gross income.

2. Calculate Your Monthly Expenses

Once you understand your income, you’ll want to similarly run the numbers for your expenses. Start by reviewing your bank and credit card statements over the past three to six months to get an idea of your typical monthly spending. Break down those expenses into categories such as necessities and discretionary spending.

Necessities

Group recurring monthly charges together or split them into categories like rent, utilities, and insurance. Also, account for expenses that don’t recur monthly, such as insurance premiums, car registration renewals, and tax bills.

Discretionary Spending

With discretionary spending, it may be better to break down your categories more fully. For example, eating out and entertainment don’t always go together, so calculate each amount individually. The more comprehensive your expense categories are, the easier it will be to understand where your money is going and how to manage it better.

3. Set Realistic Goals

Once you know how you’ve been spending your money, set goals on how you want to manage your money going forward. For example, if you’re hoping to pay down your debt faster, set a goal for how much you’ll put toward debt payments each month. Be ambitious yet realistic with your goals. Set specific, measurable, achievable, realistic, and timely (SMART) goals that require you to stretch a little but are still attainable.

4. Track Your Spending

Tracking your income and setting goals is one thing, but it won’t do much good if you don’t keep track of your spending. Consider using budgeting software to aid in the process. These programs link up with your financial accounts and can import your income and transactions into one place, making it easier to track and categorize each expense.

5. Pick a Budgeting Plan

Now that you have the basics down, it’s time to start thinking about whether you want to use a specific budgeting plan. Here are four common budgeting methods to consider:

Envelope System

Allocate your money for each spending category, then put that amount of cash in an envelope with the name of the category. When you’ve spent all your cash from a particular envelope, you’re out of money for that category for the rest of the month unless you shift money from another envelope.

50/30/20 Plan

Allocate 50% of your take-home pay to necessities, 30% to discretionary spending, and 20% to your financial priorities, including savings and paying down debt. Adjust the proportions to fit your needs and goals.

Two-Account Plan

Add up your fixed monthly expenses and divide that amount by the number of paychecks you receive each month. Deposit that fixed-expense amount into one bank account when you get paid, and the remainder goes into a second account for your discretionary spending.

Zero-Based Budgeting Plan

Assign a role to every dollar, making your expenses equal to your take-home pay. This level of detail gives you an incredible view of where your money is going, but keep a flush emergency fund in case your costs go up or you’re hit with a large expense.

6. Stick to Your Budget

Creating a budget may be the easiest part of budgeting. Keeping track of and limiting your expenses month after month so you can stick to your budget is usually the hard part. Here are some tips for staying with a budget:

Be Realistic

Setting realistic goals is crucial because it helps you avoid falling short. This is especially important when you’re starting out and need all the motivation you can get.

Plan Ahead

It’s almost a guarantee that life won’t go as you planned, so it’s important to keep emergency savings just in case. Also, keep in mind that some recurring charges don’t happen every month. Plan for those expenses that occur quarterly or annually.

Be Flexible

As your life and expenses change over time, create some room for flexibility so you can adapt. If your budget is too strict, a few expenses can throw everything off.

Pivot When Needed

If you notice that your budget isn’t serving you well or your financial situation or goals have changed, don’t be afraid to make adjustments to your approach so your budget can continue to help you manage your money effectively.

Use Credit Cards Responsibly

If you use credit cards, it’s critical that you use them responsibly. This includes tracking your expenses so you stay within your budget. Ideally, keep your balances low and pay them off in full each month to avoid late payments and an accumulation of debt.

Above All Things, Remember Your Goals

Making a budget can be an important step in the right direction for you. It’ll show you where your money is going and where you may have room to spend less so you can save for a car, a home, or whatever your financial goals are. As you work with your budget each month, remind yourself of the reasons why you’re doing it. Evaluate your progress periodically to make sure you’re on track to meeting your goals.

At O1ne Mortgage, we are here to support you in achieving your financial dreams. For any mortgage service needs, call us at 213-732-3074. Let’s make your financial future a reality together.

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