Inflation is causing financial stress for many Americans. To mitigate this, it is important to build a more effective budget. Keeping a close track of your money can significantly improve your finances.
Housing, transportation, and food are the most expensive budget categories, according to the Bureau of Labor Statistics. Many people tend to be overly optimistic about their costs until they take the time to track their expenses properly. “Earning greater income to cover your spending can relieve some of your worries, but for now, you may need a better budget,” said Billy Hensley, president and CEO of the National Endowment for Financial Education.
To start building a better budget, begin by assessing your current situation. Track your spending over the past three months to get a realistic picture of your income and expenditures. “The starting point is always to assess your current situation,” said certified financial planner Don Edlin, a senior financial coach at Financial Finesse.
Review your credit card bills, invoices, and other receipts to average out your fixed and variable expenses. Use this average as a benchmark for your budget categories. There are five methods to improve your budget:
1.
Use a spreadsheet or pen and paper to list all your sources of income on one side and all your mandatory expenses on the other.
Improving spending habits
2.
Utilize budgeting apps that link to your banking and credit card accounts to automatically track and categorize your spending. 3. Try the “cash stuffing” or envelope method, where you withdraw your spending money as cash and divide it into envelopes representing your monthly expenses.
4. Follow the 50/30/20 rule, which suggests splitting your after-tax income into 50% for needs, 30% for wants, and 20% for savings or debt repayment. 5.
Practice reverse budgeting by allocating part of your income to savings first, then spending what’s left. To avoid common budget-busting mistakes, focus on housing, transportation, and food, which account for 63% of average household annual spending in 2022. “If you want the most bang for your buck, focus on these three budget categories,” said certified financial planner Nick Holeman, director of financial planning at Betterment.
Experiment with different budgeting methods and don’t be discouraged if your first approach doesn’t work. Budgeting is not one-size-fits-all, and it should adapt to changing circumstances. “Budgeting is not a one-size-fits-all approach,” Hensley said.
“Our circumstances also change, and we must respond and react to the variables that life throws at us.”
