How to Create a Budget You Can Actually Stick With
Do you feel like your finances are out of control? Are you charging too much on credit cards each month? Do you feel like you are always strapped for cash? Do you sometimes wonder where you are going to come up with enough money to pay your bills? If any of these describe your financial situation, putting a budget in place may help you. Here are five easy steps to take to start the process of creating a family budget that you can stick with.
The best way to start developing a budget is to begin tracking your current spending. For the next month, track every cash and credit card expenditure – some people prefer paper tracking, but there are many online and app-based trackers available to help you. This will give you the most accurate picture of where your money is currently going and will be very helpful later on in deciding what spending habits you may be able to reduce or cut out altogether.
Get an Accurate Picture of Your Income and Expenses
This is truly the first step in developing a budget. You need to know how much money you have coming in each month and how much you have going out to pay bills. Write it all down, track it with an app, or use a spreadsheet, but you need to get a clear picture of your income and expenses. Make sure you also include quarterly or semi-annual expenses in your budget as well, for example real estate taxes, life insurance, and homeowner’s or renter’s insurance.
Figure Out Your Disposable Income
Your disposable income is the money that is left over each month after all of your bills have been paid. This is the money that can be spent on discretionary items. To figure out your disposable income, add up all of your income, add up all of your expenses, finally, subtract the expense total from the income total.
Total Monthly Income – Total Monthly Expenses = Disposable Income
Disposable income can be used for the items that are wants and not needs. If discretionary spending is too high, this is the best place to start cutting items from the budget.
Decide What Can Be Cut from Your Budget
Besides discretionary spending, such as eating out, shopping for unnecessary clothing, shoes, or toys, there may be some other line items on your budget that can be reduced. For instance, can you save money by choosing a smaller cable or satellite package for television? Is there a cheaper internet service provider, or a way to save on your home phone? Many times, you are even able to call these types of service providers and ask for current promotions that could save you money as well.
Include Savings as a Part of Your Budget
While savings are technically a discretionary part of your budget, you really should look at it the same as you would any other expense each month. Why look at it as an expense? Because it should be accounted into your budget every month.
It should be just as important to put money into your IRA or 401(k) as it is to pay your rent or mortgage. Setting money aside for retirement each month can be made easier if you have the money come directly out of your paycheck from your employer and go to your 401(k). If you are self-employed, you may want to set up a separate savings account that a set amount of money goes to each month to be invested. If savings are set aside even before you get your paycheck, it will be easier to keep this a priority.
Make Sure Your Budget Is Realistic
Don’t set your budget and yourself up for failure. Trying to trim your budget is good, but don’t try to trim it to the point that you won’t be able to live within that budget. For instance, if you don’t allow yourself any spending cash during the month for eating out, you may find it too restrictive. So instead of cutting this out entirely, budget it in – but at a lower level than before. So, if you used to eat out every day during your lunch hour, try cutting that down to only eating out once per week – it will save money, but you won’t feel so deprived.
One great way to help stay on track is to use an online budgeting tool that is linked to not only your banking and bill payment accounts, but that also incorporates your progress towards achieving your financial goals and plans. One of the most common reasons most budgets fail is the short term thinking and the instant gratification that comes from spending, rather than saving, for a longer term and more meaningful life goal. This is one key area a fee-only financial planner can help.