If it seems like your money disappears as fast as it comes in, you need a budget.
If you have trouble saving for your dream vacation, you need a budget.
If you don’t know where your money goes each month, you need a budget.
With some budgeting basics, you can transform your financial future.
What is a Budget?
A budget is a financial plan for a defined period.
- Helps you keep track of how you spend your money.
- Allocates specific amounts for certain purposes
- Enables you to make and keep financial goals
Examine Your Financial Goals
As you establish a budget, examine your financial goals.
Start by making a list:
- Short-term goals (e.g., new car, vacation)
- Long-term goals (e.g., your child’s college education, retirement).
Next, add details about your goals such as the:
Determine what financial goals will be pursued now (with savings) and what will be saved for a later date.
Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.
Budgeting Basics Tip: Involve the Entire Family
Agree on a budget up front and meet regularly to check on your progress.
Identify Your Current Monthly Income and Expenses
First, gather all the hard numbers for your budget. How much income do you have each month? What are your monthly expenses?
You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose.
Popular Budgeting Tools Are:
Start By Adding All of Your Income
In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support.
Add All of Your Expenses
Divide Your Expenses into Two Categories
To see where you have a choice in your spending, it helps to divide them into two categories:
- Fixed expenses (e.g., housing, food, clothing, transportation)
- Discretionary expenses (e.g., entertainment, vacations, hobbies).
Make sure your budget includes any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on.
To make sure that you’re not forgetting anything, it may help to look through:
- Canceled checks
- Credit card bills
- Receipts from the past year
Treat Your Financial Goals as Expenses
Whenever possible, treat your goals as expenses and contribute toward them regularly.
For example, if you want to buy a new laptop for $2000 within the next year, consider planning an expense of $166.67 for the next 12 months.
Evaluate your budget
Once you’ve added up all of your income and expenses, compare the two totals.
Spending Less than You Earn
To get ahead financially, it’s important to spend less money than you earn.
If you have a surplus after all your expenses are paid, then you’re on the right track. Spend time determining if your extra income is put toward your goals.
Spending More than You Earn
If you spend more than you earn, then you’ll need to make some adjustments.
Look at your expenses closely and cut down on your discretionary spending.
You may also have to save additional in your budget to pay down any debts that you’ve accumulated.
Avoid using credit cards if you don’t have the money to pay them off each month. Credit card debt will continue to increase if you use it for things that you can’t afford.
And remember, if you do come up short on money, don’t worry! With some some determination and self-discipline, you’ll eventually get it right.
Monitor your Budget
You’ll need to monitor your budget periodically and make changes when necessary.
But keep in mind that you don’t have to keep track of every penny that you spend.
The less record keeping you have to do, the easier it will be to stick to your budget.
Above All, Be Flexible.
Any budget that is too rigid is likely to fail.
Be prepared for the unexpected. You never know when your roof will leak or when your car transmission will go out.
Budgeting Basics: Tips to Help You Stay on Track
Consider Timing When Starting Your Budget
Choose a time when it will be easy to follow and stick with the plan. This might mean the beginning of the year instead of right before the holidays.
Find a Budgeting System that Fits Your Needs
This might mean a budgeting software or a workflow that you can manage easily.
Distinguish Between Wants and Needs
Be committed to paying for “needs” like groceries first before indulging in expenses that are “wants” such as designer shoes.
Build Rewards into Your Budget
For example, eat out every other week.
Aim to make budgeting a part of your daily routine. See it as a fun game to win your financial freedom.