Any financial expert will tell you it’s important to live within your means and create a budget. The problem is, very few financial gurus explain exactly how to create that all-important budget, especially one you can actually stick to.
So instead of offering that same old advice about why you need one – “You’ll go into debt,” or “You’ll wind up destitute in old age,” blah, blah, blah – let’s talk instead about how you can prioritize your spending and build a realistic, sustainable budget.
The first key to building a realistic budget is to take an honest inventory of all the ways you’re spending money. You should account for every expense you have and include it in your budget. Don’t forget about or omit certain bills just because they only occur once or twice a year. Those expenses – like traveling home for the holidays or your membership fee to join a student or professional club – count too!
A general rule of thumb is that your budget should include an itemized list consisting of two broad buckets: necessities (stuff like rent, food and college textbooks if you’re in school), and wants (items like music downloads or birthday gifts for others).
There are easy ways to keep track of your expenses, like saving your receipts and using a check registry to monitor your spending. If itemizing your purchases isn’t something you’re good at, request that your bank mails you a monthly bank statement. Anything you purchase from your checking account will be listed, along with any deposits or withdrawals you make. Review everything listed on your statement and make sure there are no fishy transactions or purchases unaccounted for.
Once you itemize all the areas where you regularly spend money, you’ll be well on your way to gaining control of your finances. Compare your spending with your income. Is there more money going out the door than coming in? If your monthly expenses exceed your income, you’ll need to adjust your spending and prioritize your bills, based on what’s most important.
Necessities obviously come first. After all, you need to eat and keep a roof over your head. But what about those “wants” – like college basketball tickets or going out on Friday nights? If these activities interfere with being able to pay your bills, they may be luxuries you need to cut back on.
Note: It’s easy to fall into a habit of putting extra expenses onto a credit card, but that’s an easy way to break your budget. After all, you’re still responsible for paying off the balance. Instead, consider these tips for living a frugal (but fun!) lifestyle.
You may be doing your best to manage today’s expenses – but what about saving for tomorrow? If you haven’t yet added “savings” as a category in your budget, it’s not too late. The money you save now is essential for helping your income grow and keeping your overall finances running smoothly.
Saving money helps you “pay yourself first,” making your own financial needs and goals a priority – whether the goal is to buy a new car, take a summer trip or just build an emergency cash cushion.
So go back now and add “savings” to your list of “expenses.” Put it under the “necessities” and think of saving money as something you must do regularly – just like you must pay your landlord or any credit card debt you may owe.
If necessary, tweak your discretionary spending. Be willing to nix some of those “wants” to make room for your savings.
Despite all the hoopla about budgeting, it’s really not rocket science. The three steps outlined above are an easy, no-fuss way to create a budget you can happily live with.
Finally, budgeting isn’t a “set it and forget it” kind of deal. So once you’ve established your budget, make sure you check out our other advice about sticking to a budget, and avoiding budget pitfalls.
Tell us how you do it! Do you have a written plan, or something you update regularly on your tablet or mobile device? Do you work with a financial professional? Share your tips so we can spread the wealth!