How to Build a Budget
A solid budget is an essential tool for managing your finances and improving your credit.
Check out more tips on how to create a quick start budget to help improve your credit quickly.
Video Transcript
If you're striving to improve your credit score and overall financial health, creating a solid budget is essential. A budget can help you save money to pay down your debt and curb overspending, which will help you manage your cash flow, reduce your credit utilization ratio, and ensure no bill goes unpaid.
All things that can boost your credit score, and strengthen your financial future. Here's how to get started.
Step number one: Choose a tool, a pen and paper, a spreadsheet, or an online budgeting tracker. Choose the option you think will be easiest for you.
Next, understand your cash flow. To start, add up your income. Record all the after tax income you earn each month, starting with your salary or hourly wages, and adding in any other income from things like investments, social security checks.
Next, record your expenses. Start with the obvious, like your rent and groceries, then factor in discretionary spending, like eating out and buying clothes.
You should also include contributions to your savings account and debt payments as expense categories. So if your monthly after-tax-income is $5,000, for example, the sum of your expenses should not exceed $5,000. If you only need $4,500 to cover your planned expenses, then that's great news. You can contribute an extra $500 to paying down debt or saving each month.
Keep adjusting your budget until you know where each dollar of the $5,000 belongs. If your planned expenses are more than $5,000, it's time to cut back on spending or increase your income until the amount coming in matches the amount going out.
Now it's time for step three. Start tracking by comparing your budget plan with your financial reality.
The concept is simple. Track what money is coming in and going out. This is the most important step because it reveals the spending habits that may be knocking you off track each month and gives you a chance to right the ship and improve your credit health. Don't wait until the end of the month to do this step.
Diligent tracking is key to making sure you meet your budget and goals you may have, like paying down a credit card and saving money.
And now with your budget in place comes the hard part, sticking to it.
Here are a couple tips.
Choose a time frame that works for you. If 30 days is too long, try budgeting for each pay cycle or in two week chunks.
Keep it simple. Resist the temptation to create 45 different spending categories. Keeping track is easier when you streamline and group expenses under a few simple categories.
Focus on your goals. Whether you're saving for a down payment on a house or striving to pay down high interest rate debt, keeping your eye on the prize will motivate you to stick with it.
Don't forget, investing and managing your budget means you're investing in your credit health. Whatever your financial goals might be, sticking to a budget can get you on the right track. Get started on building your budget today.
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