Starting a budget is not only a good way to start saving money, but is also a good way to identify how you are spending your money. When trying to figure out how to start a budget, it’s also important to note what your money saving goals are. It can be a short-term goal to build up an emergency fund, long term for retirement, or even temporary to save up for a Disney vacation. Once you’ve figured out what your goals are, it becomes easier to plan your budget.
To get started, you need to figure out what your take-home pay is after employer withholdings, taxes, insurance premiums, and retirement. For example, John Doe has a gross income of $60,000 a year, but his take home pay is $48,000 a year. After you figure out your take home pay, you then need to figure out how much you pay a month for housing, food, and other necessities. In John Doe’s case, let’s say he overestimates that it costs him $20,000 a year to pay all his bills, groceries and gas. That means that he really has $18,000 left over.
John Doe decides he wants to start saving budgeting for an emergency fund in case he loses his job. An emergency fund is around 70% of your gross income, or 3-6 months’ worth of pay. For John Doe with a gross income of $60,000, that means he’d have to save a minimum of $10,500. To figure out how much you’d need to save, let’s use John Doe’s math as an example
- ___$60,000____ divided by 12 months = ____$5000_____
- ____$5000_____ (last answer) times 70% = ____$3500/mo___
According to the math, he’d have to have at least $3,500 a month for an emergency fund. From here, you can start to formulate a budget strategy to work with.
Since he overestimated his costs of living expenses to $20,000, it would be good idea to leave some wiggle room within his budget for inflation just in case costs go up. At the current amount of $18,000 after his bills are paid, he figures out that he wants to start by saving $10,500 based on the calculations above.
- ___$10,500/yr____ divided by 12 months = ____$875/mo_____
- ___$875/mo____ divided by 4 weeks in a month = ____$218.75/week_____
Based on the calculations above, he can choose to place $875/mo or $218.75 a week in a savings account. Most people will not have that kind of cash lying around, but you can use the general idea to work with any amount of money, big or small.
Do you budget your money? If so, what tips do you have to get started?