You’ve decided that your budget needs an overhaul in order to reach your financial goals. But you might find it difficult to manage your discretionary funds after you’ve paid your essential bills each month. Find out how to create a budget that actually works so you can take total control over your spending and manage your money more efficiently.
Necessities vs. Non-Necessities
Before you learn how to budget for non-necessities, it’s important to define what a non-necessity is compared to a necessity. The best way to do this is to determine the monthly bills that you simply can’t avoid: rent, student loans, car payments, and utilities are common necessities. However, if you find that your budget is extremely tight, you may decide to take more drastic action and reduce some of these costs. You could try refinancing your student loan, moving to a less expensive home, or trading in your financed car for something you can buy in cash.
Non-necessities, on the other hand, are an excellent place to start reigning in your spending. These include expenses that you can actually control. Groceries and eating out, for example, are common culprits when it comes to over-spending. You can also control things like shopping and entertainment.
3 Steps for Creating an Effective Budget for Non-Necessities
Now that you know the difference between essentials and non-essentials, it’s time to get that spending in check. Here are three easy tips on how to budget for non-necessities.
1. Determine Your Baseline Costs
The first step for creating a non-necessities budget is figuring out those baseline costs of your monthly essentials. Start by totaling your take-home pay after you pay taxes. If your employer also takes out things like health care and 401(k) contributions before you get your check, you can use the amount that gets cashed or deposited into your checking account.
You can then compare the money you bring in to how much you need for those basic living expenses. Again, if the numbers are totally off, you may need to think about drastic changes in your living situation to make it work. Otherwise, subtract your necessary living expenses from your take-home pay to see how much you have to work with for other expenditures throughout the month.
You’ll use this number to inform your choices in the next two steps.
2. Decide How Much to Save
Your next step in budgeting for non-necessities is figuring out how much you want to put away into savings each month. This is tricky because, although a savings account isn’t a required bill each month, padding your account is essential for when you have an emergency come up or a long-term goal that requires a large amount of money.
Think about your upcoming needs for the short-term, mid-term, and long-term. For the short-term, you should consider saving $500 for emergencies like medical bills or a car repair. In the mid-term, think about things you’d like to save up for, like a down payment or a vacation. Finally, consider how much you’ll need to put away to take care of long-term goals like retirement.
When you add up all these categories, it may seem like a lot out of your budget each month. But you really should prioritize each type of savings, even if it’s technically a “non-necessity.”
3. Categorize Your Non-Necessities
Now that you’ve designated a set number of dollars for necessities and your savings goals, you can finally divvy up your remaining funds for those non-necessities. Start by categorizing your money by your frequent spending habits. For an accurate view of your spending, analyze your bank account from the last few months or use an app that does it for you.
Since you know how much you have to work with each month and have an idea of how you currently spend, you can figure out the best ways to cut back if needed. Choose how many nights a month you can afford to go out to eat or how much you can spend on new clothes or movies each month.
Budget for Credit Help
If you’ve accumulated multiple negative entries on your credit report, your budget might be overblown with excessive interest on your loans and credit cards. Getting professional help with credit repair could help you financially in the long run. Get a free consultation today with Ovation Credit to find out how we could help your specific situation.