While the concept of a budget is often attached to unpleasant thoughts of cutting back on leisure spending like eating out, it’s nothing to be afraid of.
A budget simply shows how much money you have coming in and how those funds are spent. And it’s one of the most important tools in building a successful financial future, because it helps you get the most out of your money.
Regardless of economic standing or which generation you fall into, every consumer can benefit from creating and managing a budget. A budget gives people a sense of control over their money, which is very empowering. Think of a budget as a financial foundation. Each person’s foundation is going to be different, just as each financial situation is different.
Choosing a Budgeting System
There are four basic methods for creating, tracking and monitoring a budget. Each system uses different techniques, but they all center on organization and attention to detail.
- The Notebook and Pen: This is the oldest method for budgeting, and it’s also the least expensive option. With this method, you simply write down all of your sources of income and all of your expenses. As long as they even out, you’re good to go.
- The Spreadsheet: The most popular spreadsheet software used for budgeting is Microsoft Excel. Many websites offer free samples of Excel budgeting worksheets that consumers can use, instead of trying to create their own. A spreadsheet lets you organize a lot of information easily and does the math for you.
- Free Online Software: There are several free web-based software programs that can help with budgeting. Such programs like Manilla and Mint.com allow you to create and group your expenses into categories and track your spending, so you can see exactly where your money is going as soon as the transaction takes place.
- Financial Software: There are also financial software programs, but you need to be computer-savvy to use them. Quicken and Microsoft Money are good, if you have a great deal of experience with web-based software programs.
You can also check with your local credit union or bank for tips and tricks. Your saving institution may even have budgeting worksheets on hand to get you started. If you prefer, the U.S. Financial Literacy and Education Commission (FLEC) has numerous budgeting worksheets and resources to help you at any stage of life.
Creating a Budget
Budgeting strategies and techniques vary across the board. There will be differences, for example, between a budget for a first-year college student and one for a retiree. But there are five basic steps in creating a budget. They are all important because they build on one another, helping you organize your finances in a sensible way.
Step 1: Determine Your Financial Goals
There are two types of financial goals: immediate and long range. Immediate goals refer to how you want to use your money today, while long-range goals deal with how you want to spend your money in the future. Both types are important and should be carefully considered. Weigh each goal against the next to determine which one takes precedence.
You need to determine which goals address necessities and which ones cover luxuries. Then, you can prioritize your financial goals accordingly.
Immediate financial goals would include paying your mortgage or rent, car payment, utilities, child care, food, cell phone and household supplies. Secondary goals would address clothing, newspaper or magazine subscriptions, and an evening out with family or friends. Getting out of debt might be another secondary goal. Luxury goals could include a massage, a family vacation or international travel. Long-range financial goals could also include retirement savings, investments and charitable donations.
Step 2: Calculate Your Income and Expenses
After you determine your financial goals, you can implement a plan for reaching them. To do this, you need to determine your income and your expenses. Most people budget on a monthly basis because most bills follow a monthly schedule.
Start by making a list of your monthly income sources, including your salary (after taxes), any bonuses you incur on a regular basis, and child support or alimony payments. If you don’t know the exact amount, you can use an estimate. Once you have your numbers, add them up. The total is your monthly income.
The next part of the equation is your expenses, which fall into three categories: fixed committed expenses, variable committed expenses and discretionary expenses.
- Fixed committed expenses: These have a fixed monthly amount, such as your mortgage or rent.
- Variable committed expense: These vary from one month to the next month based on need, and would include groceries and gasoline.
- Discretionary expenses: These are optional expenses and include recreation and entertainment. A gym membership would also fall into this category, unless you have signed a contract — which would put it in the category of fixed expenses.
If you are spending more than ten percent of your monthly income on credit card debt payments, you should consider speaking with a nonprofit credit counselor. Over the telephone or online, a free credit counseling session will walk you through your budget and recommend expenses that can be reduced or eliminated. If you qualify for a debt management program, you may be able to reduce your monthly debt payments as well.
Step 3: Analyze Your Spending and Balance Your Checkbook
The ultimate goal in budgeting is to make sure your expenses do not exceed your monthly income. If this is the case, and more money is going out than coming in, then spending habits need to be examined and modified. This doesn’t necessarily mean you need to start penny-pinching; it just means it is time to revisit the discretionary cost category and see where you are willing and able to cut the fat.
If you make any payments by check, your checkbook register can help you keep track of incoming and outgoing money, and what you spend money on. Although paying by check is becoming rarer, those who stick to this payment method should keep their checkbooks balanced. This will help you avoid overdraft fees or bounced checks, and it can shed some light on your spending habits.
Here are the basics:
- Keep records for all your deposits and purchases. Record each one in your check register, which the bank will provide you.
- Print out your monthly bank statement if you aren’t already getting one in the mail. If you’re doing everything online, there is software that can make this step — and budgeting — really easy.
- Do your own math for deposits and withdrawals to make sure your bank hasn’t missed anything or taken any liberties with your money. Reconcile line by line, making sure your record of checks is the same as the statement.
- Find the ending number from each monthly statement and work backward, check to see to see what has cleared, and what has not cleared. Deposits that haven’t cleared will need to be subtracted from your balance. If your checks haven’t cleared, they will have to be added back to your balance until they do.
- Go line by line and account for any fees you’re charged. Seeing them up close may prompt you to call and ask to have some removed, which the banks often will do if you persist. Also, add the pennies of interest you may have received.
Step 4: Revisit Your Original Budget
After you’ve had a chance to monitor your income and expenses for a month or two, you will be more aware of areas that need adjusting. Maybe your initial monthly income estimates were off, or perhaps you didn’t account for expenses like car repairs or veterinarian bills. Now you can make the necessary and informed adjustments to have a budget that is more comprehensive and well-rounded.
Once you work out all the kinks in your budget, you should be able to stick to it for a length of time. However, it’s not meant to be set in stone. You must manage your budget regularly by accounting for changes in your income and spending needs. It’s recommended you do this every three months.
If you get a promotion, for example, you can increase your discretionary spending as well as your savings goals. On the other hand, a layoff or shorter work hours could mean cutting back on spending until you find a way to supplement your income.
You can also use regular budget evaluations to prepare for your plans in the near future. Some individuals may feel more comfortable cutting back discretionary spending for the month leading up to a family vacation or the holiday season.
Step 5: Commitment
Creating a budget is a great step in working toward a more financially sound future for you and your family. Making a commitment to stick to the budget you created is what will get you there. The best way to stay committed to your budget is to keep a realistic outlook, evaluate it often and don’t be afraid to make adjustments. A budget is all about balance.
Managing Your Budget When Unexpected Bills Arrive
Once you have a workable budget in place, setting aside $50 per week could add up quickly in an emergency fund. In a year you would have $2,600 set aside, plus any interest, for when the refrigerator stops working or when the transmission blows.
Experts recommend looking at your withholding taxes to find hidden cash. If you receive a large refund every year, perhaps you need to change your filing status to receive additional money in your paycheck to put toward an emergency fund. Unless, that is, you are putting your tax return funds into that fund.
Medical crises in particular can turn a balanced budget upside down. Negotiate large medical expenses, such as an emergency hospital stay, with the hospital. (Almost all hospitals negotiate fees.) Often if you contact them immediately instead of waiting until the amount goes into collections, the hospital or provider’s office can set up a payment plan.
If not, a medical bill consolidation may help, as it allows you to combine all your medical bills into one lower monthly bill through an agency or a bank loan. This not only makes it easier on you, but the arrangement protects your credit score because you are able to make on-time payments. The downside is it may take you longer to pay your debt in full.
The Benefits of Budgeting
Everyone can benefit from taking a pronounced and proactive approach to control their finances. Committing to your budget will help guide you into a much better financial position.
Budgeting can improve your life because it:
- Reveals waste. Creating a budget sheds light on areas that many people neglect to notice on a day-to-day basis.
- Directs priorities. A budget allows for people to look at the big picture of their spending habits and set new priorities to maximize their money’s potential.
- Creates new habits. When people get a clearer picture of how they’ve been using their money, it allows them to shift expenditures into different categories, making them more conscious of unnecessary spending.
- Reduces stress. Finances are one of the top stress-inducing situations. When there is a sense of control over the money coming in and the money going out, the stress can transform into a feeling of empowerment.
- Educates. Having a budget allows people to view money as a tool, shifting the mindset to focus on long-term goals and future needs.
Creating a budget is the first step, but maintaining the budget is where you start to see real growth in yourself and more stretch in your dollar. Sticking to a budget can be a difficult task for people who aren’t used to spending boundaries or self-discipline in their finances, so it’s important to maintain a positive attitude toward the process.
Staying motivated can help alleviate some of the pressures of budgeting. Consider setting aside some money each month so you can look forward to a relaxing vacation at the end of the year.
Finally, set realistic goals. Start slowly, building up to a plan that works for you and your lifestyle.