One of the best ways to get ahead financially is by making a budget and sticking to it. However, many people shy away from budgets because they think of them as too restrictive. A budget shouldn’t limit you; it should give you more freedom.
Think of a budget as a spending plan, a way to tell your money where to go rather than the other way around. It is a critical financial tool that will help you build wealth and set yourself up for financial success.
No matter your age or income bracket, a budget can make a difference to your bottom line.
At its most basic level, a budget is a plan for your money. It’s a way to organize the income coming in and the money you spend to ensure you have a balance between the two. You can also think of a budget as a spending plan.
To get started, you will need to know your after-tax income from all sources and how much you spend each month. At the very least, you want your monthly expenses to be less than the income you have coming in.
One of the main reasons that a budget is important is because it lets you take control of your money. With a budget, you know exactly where your money is going each month and how much you have in your bank account.
It gives you the freedom to use your income to achieve your financial goals, such as buying a house or having a baby. Without a budget, you are scrambling to pay the bills and wondering why your bank account is empty.
If you’re ready to get started with a budget, the steps below will get you organized and on your way. When you’re first making a budget, just go with the basics until you get the hang of it. It’s okay if you struggle at first - you will eventually find the right balance.
Getting started with budgeting means some initial legwork. Once you have everything organized, it will take you much less time to keep it going and check your spending against your plan.
You will need to figure out how much money you have and where it’s located. Review all of your banking accounts, retirement accounts, credit cards, loans, mortgages, and other debts and accounts. Pull up a spreadsheet and keep a running tally of everything you owe.
This will give you a better idea of where you stand financially before making your first budget.
Another piece of the budget puzzle is your income. You need to determine what money you have coming in, including your income and that of your spouse. Don’t forget to account from other sources such as investments, life insurance proceeds, an annuity, social security, and so on.
You can add all this information to the same spreadsheet where you included your account balances and debts. It will help to have all of your financial information in the same place so you can organize it and use it to create your first budget.
To make a budget you can stick with, you need to be accurate with your expenses. Gather your credit card and bank account statements from the last three to six months. Jot down some general categories such as groceries, utilities, mortgage, car payment, and so on.
Once you have everything, tally up your expenses in each category for every month’s statement. This will give you an idea of where your money goes every month. Don’t forget to include irregular expenses such as car repairs and insurance premiums.
Just knowing how much you spend in each area can have a big impact and help you cut back. Seeing your spending in black and white is a great way to spot overspending habits you may not have noticed otherwise.
Your budget will need to cover important items such as food, shelter, and transportation. However, anything beyond the basics and your obligations such as debt can be used toward your financial goals.
Use this as an opportunity to identify what you want long term financially. Do you want to retire in 10 years? Buy a new house or a vacation home? Plan for a new baby? Having a budget will help you reach these kinds of goals by keeping you on track.
Make sure you incorporate your goals into your budget. Set aside money in a separate bank account that can be the down payment on that house you want. You will be more likely to stick to a budget if it helps you get where you want to go financially.
When you’re making your budget, you will need to make some tough choices, especially if you spend more than you bring home. Once your basic needs like food, clothing, and shelter are covered, everything else is a want.
Debt obligations should take priority since missing payments can have negative consequences on your credit. The sooner you pay those off, the sooner you will be in control of all of your income.
This is where you may need to make some trade-offs. If your home is too big or too expensive for your income and debts, consider moving to a cheaper place. Look at the car you drive and consider trading it in for an older, more affordable model. This can make a big difference if you’re driving a gas guzzler and your work is far.
While this may be painful at first, keep in mind you’re in control of your finances. You’re doing this so you can reach your financial goals and get ahead. Lowering your monthly payments for rent, mortgage, or car payments will free up money you can use to pay off debt and save.
Talking with a qualified financial advisor can help you get your finances organized and define your long-term financial goals.
Creating a budget is great but it won’t do you any good if you don’t stick with it. You will need to track your spending every few days and make sure you stick to your budget limit for each category.
There are some great apps and software that can make this easier for you. For example, Mint and Personal Capital both have budgeting functions and can connect to your bank accounts. All transactions get imported so you just need to make sure they get put in the right category.
Check your spending regularly to make sure you’re on the right track. If you have unexpected expenses, figure out where you can cut back or how you can pay for them.
This is why it’s important to have an emergency fund. It can help you pay for something unexpected without derailing the rest of your progress.
One of the best things you can do for your savings is to automate them. If your employer offers a company-sponsored 401(k) or another retirement option, have the money taken out of your paycheck.
This way you won’t even notice when the money's gone. In addition, set up an automatic transfer from your checking to a savings account every paycheck. You won’t miss it and it will make it easier to save for big goals.
It’s a lot easier to stick to your budget and reach your financial goals when you minimize your decisions about saving vs spending.
If you can have the money transferred to a different bank account, even better. The more hoops you need to jump through to get to the money, the less likely you are to spend it unnecessarily.
One of the biggest mistakes people make when creating a budget is omitting irregular expenses. Things like new tires or a home insurance premium can derail your carefully crafted budget if you forget to include them.
You may think you have put together the perfect budget and all you have to do is follow it to the letter and you’ll be good to go. However, if you forget to account for expenses that happen every few months or once a year, you risk blowing your budget, which can be discouraging.
Go back through your expenses for the past six months to a year and determine your irregular expenses and how often they happened. Make sure you factor them in when creating your budget, so you don’t get a surprise when it comes time to pay them.
While some regular expenses such as your car insurance premium are expected, others are not. For example, let’s say you come home to your washer leaking or your car stalls on the highway.
You need to come up with the money to pay the mechanic or the plumber, but this wasn’t included in your budget. What do you do? Having an emergency fund will help you in these kinds of situations.
An emergency fund is money you set aside to cover unexpected expenses. Start by setting a goal to save at least $500 in your emergency fund and work toward having three to six months’ worth of expenses.
Having an emergency fund can be the difference between using your credit card and going into debt to pay for something or having the cash to cover it.
Just make sure you only use the money for true emergencies. Wanting a larger TV or a new purse does not count as an emergency. If you end up having to use your emergency fund, build it back up as soon as you can.
If you have debt such as a loan or credit cards, you need to make paying them off a priority. When you have debt, your income is not yours since you need to earmark some of it for the payments.
Make sure you’re paying at least the minimum on all debts and try to add more to pay down the balance faster. There are several debt payment strategies with the two most popular ones being the debt snowball and the debt avalanche.
Pick what works best for you and your individual situations. Once you commit, follow through and pay off your debt so you can have more control over your money.
One of the main reasons people don’t stick with a budget is because they are not realistic about their income and spending. When creating a budget, make sure you give yourself enough buffer and allow for unexpected expenses.
If you need to cut back in certain areas, don’t do everything at once. Start with one category and work on getting it under control before moving to the next one. If you try to cut spending too fast, you will burn out.
When creating a budget, make sure you pick a method or an app that matches your personality and goals. It’s ok to try several budget styles before settling on the one that works best.
Also, make sure you give yourself and/or your spouse fun money. That’s money you are free to spend any way you want. Having some wiggle room to spend as you please will make it easier to stay on track in other budget categories.
Review your budget regularly and tweak it to match your evolving needs and goals. A budget is not something you set up once and forget. It’s something that grows and changes with you to fit your lifestyle.
Creating a budget may seem daunting at first until you realize it’s just a spending plan for your money. It helps you put your income to work toward reaching your financial goals and getting ahead.
The best way to stick to your budget is to be realistic about your expenses. Don’t forget to include irregular expenses and earmark some fun money every month. Build your emergency fund to help you meet unexpected expenses without going into debt.
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This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at the website NextGen Wealth.
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