We’ve all heard the success stories of people who stick to a strict budget. They say sticking to a budget makes you two times more likely to report no financial worries. That means your chances of improving your lifestyle and decreasing your stress level is doubled if you create and adhere to a budget. Easier said than done, am I right?
Budgeting takes time, commitment, and dedication. For those of us that are looking into budgets for the first time, here are some starting points for building a budget that works for you.
- Set goals. Why do you want or need a budget? Are you looking to eliminate debt, save for retirement? Maybe get a new car or going on vacation? Knowing your end goal for the budget will help you maintain perspective throughout the rest of the process.
- Analyze your current spending habits and expenses. Experts recommend meticulous tracking of all expenses for one full month starting now. Going back through past bank statements can work, but you run the risk of missing something or not remembering what specific item you spent money on. It’s better to move forward and write down everything you spend money on. There are apps that can help you do this – but we’ll get to that later.
- Plan for out of the ordinary expenses. Do you have a month with 13 birthdays you have to spend money on? Maybe you have two cars that both have registration due in a single month. Think about those and take note of when those additional costs will need to be taken care of. Later when you create your budget, look back on this step and be sure to plan ahead.
- Pin down your income. Use your net income here. The money that you’re sending to the government as taxes before it hits your bank account doesn’t do you any good on a budget. If your income is variable, always err on the side of caution: budget for low income months, then when you have a higher income month, you can save more or treat yourself to something nice.
- Set up a spreadsheet. Get Organized. Excel and other spreadsheet software usually have budget templates that you can use, but don’t be afraid to make your own. If you prefer pen and paper, then get out a notebook. Put your total usable income at the top, then get ready to write down expenses.
- Start with set expenses. You know you have to pay insurance premiums every month. Your cable bill and your mortgage payments don’t change. Any expense you can anticipate perfectly, put it in the budget.
- Move to recurring expenses. You probably have a pretty good idea of what you can expect to pay on your water, gas, and power bills. Don’t forget to plan for changing seasons. The easiest way to do this is to budget for higher cost months. Do this with all other necessary recurring expenses.
- Plan to save. Look back on the first step. Remember your goal. How much do you need to save each month to reach that goal? Do the math so you can get the exact amount, then put it in the budget.
- Plan for variable expenses. Groceries, transportation, pet care, personal entertainment, loan payments, personal care. Use your month of expense tracking to make sure nothing gets left out. If you notice you spend a lot on eating out, budget for more groceries and less costly food. If your gasoline expense is too high, maybe it’s time to get a more fuel-efficient vehicle. Are you going out to the movies once a week but struggling to pay off a credit card? It’s time to make some changes. This section is where you have the most liberty to move money. Make the most of it.
- Watch out for common budgeting mistakes. This article from the Motley Fool has some great advice for what to watch out for. https://www.fool.com/investing/general/2015/05/01/17-biggest-budgeting-mistakes-youre-making.aspx
- Hold yourself accountable. There are a few tactics you can use to help yourself stick to the budget. One of the most common, and one often recommended for young people just starting out, is the envelope tactic. Cash your checks, then distribute the money according to the budget into separate envelopes. The envelope for your rent has just enough to cover the cost. The envelope for your wi-fi bill has only enough to cover wi-fi. And when your envelope for dining out is empty, then you don’t eat out anymore until your budget resets. It also helps to put your bills on autopay and be sure you continue to track your spending.
- Review and Adjust. Do this once as you finish your budget. Go back through and make sure you have all the numbers right. Make last minute adjustments as needed. Then be sure you review your budget on a regular basis and make changes as necessary.
Alright. We know that was a lot of information, but it’s good information. Take things step by step and you’ll be well on your way to doubling your financial satisfaction.
We mentioned there are some apps that you could use that might help you with this whole process. Here are some of the most popular financial health apps around according to Nerdwallet. See the original article here: https://www.nerdwallet.com/blog/finance/budgeting-saving-tools/
- YNAB: You Need a Budget
- Personal Capital