Everyone can benefit from budgeting, a proactive approach, to manage your finances. It may feel restricting to those who have not yet established a budget mentality, but it can allot more monies for unexpected expenses or even to start a vacation fund.
Managing a budget often starts with choosing a budget system. There are options when it comes to creating, tracking, and monitoring a budget. One of the oldest methods for budgeting is using a notebook and pen.
If technology seems more efficient, you can use a spreadsheet in Microsoft Excel or opt for online financial software like Quicken.
Step One: Set Realistic Goals
When goal setting, think in terms of short-term and long-term. Short-term goals might be something you can achieve in a month or less. Long-term goals focus on yearly, or even longer like planning for retirement.
Focus on the short-term. For instance, paying off a credit card with a balance of $500 could be one of your goals. One way to achieve this might include skipping the $5.00 latte for 100 days and opt for coffee at home. Goals can be big or small, and starting with a small goal encourages you to set even bigger goals down the road.
Step Two: Calculate Income and Expenses
Start by making a list of all sources of income including salary (after taxes), freelance income, alimony, child support, etc. Then make a separate list of all your expenses. Create subcategories to indicate fixed expenses (i.e. mortgage, rent, car payments), variable expenses (i.e. groceries, prescriptions, gasoline), and discretionary expenses (i.e. streaming subscriptions, gym memberships, etc.). Now, calculate the totals of your income and expenses. Once you have the two categories totaled, subtract your expenses from your income. Do you have anything left over? If so, can that extra money help you reach one of your goals? If not, assess how you can adjust your expenses compared to your income.
Step Three: Analyze Spending Habits
Review previous bank statements or online accounts to assess where your money goes beyond reoccurring expenses (i.e. impulse buys, restaurant dinners). Now decide if these expenses are worth it, or if that money would be better used to help you reach one of your goals.
Do you utilize the services you subscribe too? If not, consider canceling to save money.
Make note of any overdraft fees paid or bounced check fees. Could you have prevented these fees with your budget?
Step Four: Set a Preliminary Budget
Once you’ve analyzed how your expenses measure to your income, decide when and how often you’re willing to pay bills and/or balance your accounts. For online bank users or automatic payments, this could happen less frequently since you can access your totals daily. If you are looking to balance your budget manually and get paid bi-weekly, you might consider balancing on or around payday. For others, it might make sense to do it monthly.
Step Five: Evaluate Your Budget Quarterly
Learning to live on a budget can be a big commitment, so give yourself some time to adjust. Evaluate your budget at least quarterly, and ask yourself questions like:
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