Making a Budget and Sticking to It
Some people hear the word “budget” and they cringe. But a budget is not a bad thing. In fact it can become a very comforting tool to help you stay on top of your finances and get a handle on the outflow of your money. With a few simple steps, you can get an understanding of where your money goes, which will help you make SMART choices about how and when you spend.
Step 1: Where Does It All Go?
Before you can go anywhere else, you have to know where you are now. First make a list of all your fixed expenses-rent, mortgages, insurance, loan payments, cable TV, Internet Service, childcare and anything else you have that is a fixed amount every month. Next, carry this sheet with you for the next 4-6 weeks, writing down all other money you spend and what you spend it for. Lastly, after you have finished recording all the additional expenses you occur within the month, add any seasonal, annual or quarterly expenses you may have such as, property taxes, car registration and maintenance, magazine subscriptions, seasonal expenses-camp fees, holiday gifts, etc. Once you feel confident you have listed all your outgoing expenses, you are ready to move onto Step 2.
Step 2: How Much Money Do You Have to Work With?
Like your expenditures, you need to take into consideration more than just your salary. Add in your bonus pay, dividends and interest, alimony or child support, pension or retirement income, and any public assistance you receive. If your paycheck varies due to your work schedule, then use an average of the last three months. It’s okay to estimate, but be realistic and as close as possible to what you bring in.
Step 3: Putting It All Together
Add all your income. Then add all your expenses and subtract the total from your total income. If you get a negative number, it’s time to go back to the drawing board to see where you can cut back. But again, be realistic. Think of it in the same way as you do all those fad diets that spring up on a daily basis–if you can’t live with it, you know it’s not going to work! And don’t panic because there are ways you can shave a little off your expenses. For example, you can often trim your electric bill a bit by installing a programmable thermostat, or you might be able to cut some entertainment expenses by finding a different route home from work that doesn’t take you near your most tempting places. Maybe you could challenge yourself to cook one or more meals at home each week, cutting down on the eating out expenses a bit. If you’re a book or a movie lover, you can probably cut some fat there by digging into what’s available at the library. And the next time you go grocery shopping, maybe you can make a list first, or even better, make a meal plan using the weekly ads before you even walk in the grocery store.
Going overboard, though, is a bad thing. Instead, think in terms of baby steps and focus on the easy things you can do to reduce some spending because if you go cold turkey, there’s a good possibility you will fail just like with those fad diets. Remember, you’re developing a strategy for the long term, and by forcing yourself into a bunch of activities that don’t come naturally, you’re asking for failure. Focus on things that are wholly automatic, like a programmable thermostat or a CFL (or a more fuel-efficient car in the future), and also on the small handful of changes you can reasonably make to your lifestyle.
Once you get a positive number, then congratulate yourself for you have successfully budgeted for your anticipated expenses! Now set a dollar amount for each category and pin it to your refrigerator as a daily reminder.
Step 4: Set Your Amounts and Test the Water
You’ve set the numbers based on how you’re really spending money minus just a few little lifestyle changes, so these are goals you should be able to meet. It’s possible you could stay under those numbers in most categories and go a little over in others – that’s fine, just as long as you know the reasons you went over and your total across all categories doesn’t exceed the total of all of your targets.
At the end of the month reevaluate your categories and go through your receipts and statements to verify that you did indeed hit your targets overall. If you did, that’s a good thing – it means you’ve added real change to your life. But keep in mind that no one is perfect. If you have to readjust some of the numbers, it’s just part of the process, and there are some events you simply cannot anticipate, so don’t beat yourself up.
If you did make your targets, take that total amount that you have left over and add another line to your budget – debt repayment (or savings, if you have no debt) – and write that dollar amount in next to it. Each month, you’ll use that money to follow a basic financial security plan – first, build up a small emergency fund with it in a savings account, then start making extra payments on your debts. Then repeat the whole process of making target numbers. If you feel confident, try adding in some additional cost-cutting tactics. If last month didn’t go so well, don’t be afraid to revise some numbers upward (and thus reduce the amount going into debt repayment or savings).
The goal of budgeting is to keep in tune with your spending and don’t overdo it. Instead, treat it like an exercise plan or a diet – you gradually become more and more fit as time goes on and the budget begins to feel more normal in your life. Eventually, the little changes will become natural and you will be well on your way to financial security.