Most people cringe at the idea of a budget. Instead, think of a budget as a way to keep track of your income and how you use your income. A budget can give you the information you need to spend less, save more, and make smart financial decisions.
Budgeting is not so bad…Give it a Try:
- Keep track of everything you spend for one month. Get receipts for every purchase, no matter how small. This is especially important because small purchases made with cash are the ones that slip through the cracks.
- Review your bank statements, credit card statements, ATM receipts and check register to evaluate where you've spent money in the past.
- Categorize your expenses into fixed and variable. Fixed expenses are regularly occurring bills that you have little control over such as your mortgage or electric bill. Variable expenses are those that you do control and may fluctuate in cost each month. That may be groceries, dry cleaning or eating out.
- Categorize each expense as a Necessity, Important to Have, or Extra so you can prioritize later.
- Include annual expenses or quarterly expenses by dividing the cost into a monthly amount. An example is car insurance or property taxes.
- Add up all of your monthly expenses. Compare them against your total monthly income. Do you have extra income? Are you spending more than you earn each month?
It's your money and now you know where it goes!
Make Your Budget Make Sense
- If your spending exceeds your income, trim expenses.
- Try to cut spending in your largest variable expense by 5-10%. That may mean packing lunch instead of eating out every day or clipping coupons for dry cleaning or groceries. Changes do not always have to be drastic!
- If your income exceeds your spending, congratulations.
- But, are you reaching the maximum saving and investing goals that you can afford? Can you allocate more to your IRA or your children's education? If you can, do it now and let the power of compound interest work.
- Be realistic. After setting up your budget, don't obsess if your spending doesn't match your budget figures exactly. Be flexible and willing to adjust the numbers here and there while keeping sight of your financial goals.