Welcome to Two Minute Money, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important questions involving your money.
Let’s face it, being an adult can be hard, but making a budget is one of the ways you can take control of your life. It sounds daunting if you’ve never done it before, but don’t worry; we’ll break it down together.
A budget is simply a plan for how you want to spend and save, so think of it as a road map for your finances. Ask yourself: “How can I be better with my money?” Then set a goal to keep yourself on track.
In many cases, your first goal should be to build up an emergency stash of cash. Next, take a look at your cash flow—or how much money you have coming in versus how much you spend. If you spend more than you earn, you need to do one of two things: Spend less or earn more. Earning more can be tough, so let’s focus on cutting costs for now.
Separate your needs from your wants by writing out two lists to split up your expenses. Needs are things like rent, utilities and transportation, while wants can be anything from buying new clothes to eating out or taking vacations. Wants are basically anything you don’t absolutely need.
Write down how much you spend in each category every month, and be honest with yourself. Don’t tell yourself Netflix is something you need.
Now that you’ve figured out what’s essential, you can start to trim what isn’t. Do you need cable? Do you eat out too often? Do you drink too many Starbucks lattes? These are some simple things to cut back on. And don’t forget to take a look at your cellphone plan. Are you paying too much? Look up how much data you use in an average month. Then compare that to how much data your plan provides. Chances are you can probably switch to a cheaper plan.
If you want to stick to your budget, it’s important to also give yourself some fun money. Depriving yourself can lead to boredom, and bored people blow budgets.
Taking an honest look at your spending can be alarming. Perhaps that’s why two-thirds of Americans don’t make a monthly budget, according to a Gallup poll.
Be in the one third that does. Take your newfound knowledge, set a budget, and stick to it. Take control of your finances now, so you can cash in later.