Wouldn’t it be great if you could make a plan for your money, where you could keep track of every penny coming in and going out? A plan that could help you stay on track, reach your goals and aim for that dream vacation?
Good news! You’ve been able to do this all along!
So, what’s stopping people from creating a budget and making sure they continue to use it? Things like impulsive purchases, unexpected emergencies and varied lifestyles are just a few factors that contribute to the lack of budget, or following one.
A budget is a great way to see where your money is going and where you can save. It will help you become aware of areas where you can cut back to give you more breathing room, or to help you stop living paycheck to paycheck.
Building your budget
If you are someone who has an interest in creating a budget for your finances, here are some guidelines to help you begin:
1. Document your expenses – The first step to creating your budget is finding out where ALL of your money is going. Everything, down to the quarter you spent at the bubble gum machine. A great way to do this is to keep a handwritten journal or use an app on your smartphone or tablet.
One tip from Mint.com is to record all of your expenses for two months. The reason for doing this is because one month may be an “unusual” month of spending (too much or too little). Two months will give you a better snapshot of your expenses.
2. Add your income – Track all of the money you have coming in – even the birthday money your Grandma Ruby sent to you. This would include money from bonuses at work, interest or dividends from investments and any money you receive from retirement.
Make a note of your net income and the sources from where you receive your income. Record how often you will receive this money, too. You may receive this income weekly, twice per month (24 times a year), every other week (26 times a year), monthly, quarterly, or annually. Then, find your average monthly income by dividing the all of the money you make in one year by 12.
3. Create your monthly budget – Now, you’re ready to make a plan for your where your spending is allowed to go. This will help you save money and curb impulsive purchases.
Start by writing down categories for your expenses. Some common categories include monthly utilities, mortgage or rent, food, clothing, health care, insurance (health, home, auto, etc.), transportation, and entertainment.
Next, make two columns (if you’re using paper) for the “Projected Expense” and “Actual Expense” of each category. Enter how much you anticipate spending for the categories into the “Projected” side. Add all of the projected monthly expenses and determine your “Total Projected Expenses” for the month. Then, look at your projected monthly income. Figure the difference.
If your expenses are more than your income, you need to find areas you can cut back or ways to increase your income. If you do have to cut back in some areas, remember to keep your necessities (mortgage/rent, food, etc.) as a priority.
Stay on target
Congratulations! You just made a plan that will help you figure out where your money is going. Now, you need to make sure you stick to it.
It can get frustrating when things don’t go as planned. Don’t give up! Your budget is a guideline. It’s not concrete.
Here are some ways to keep up with a budget:
1. Review and change accordingly – Check your budget quarterly or every six months. If you’re still living paycheck to paycheck, you need to make adjustments. See if you’re consistently overspending in any categories. If so, it’s time to change your projections or cut money from another category.
2. Make the tough calls – There may be some things you have to decide to cut from your expenses that will be important to you. Find creative ways to sacrifice what you know you can do without – things like magazine subscriptions or your daily coffee. You may have to cut your spending from areas like dining out, shopping and your hobbies, too. Be realistic, though. You shouldn’t have to trim everything but the necessities. You need to have some enjoyment, right?
3. Think about selling or downshifting – If you find you’re still falling behind, consider selling some things around your house you can part with, like rarely-used furniture, appliances, or clothing. You might also consider selling your newer car and purchasing an older used car to lighten your payments or get rid of them altogether.
You can do it!
Making a budget is something anyone can do, but few actually do it. According to a Gallup poll, only one in three Americans actually take time to create a plan for their finances. Following through with your plan is just as crucial to your finances. Imagine how much you can help yourself by taking a few moments to track your spending, your income and your goals.
If you’re ready to begin creating a budget, our MidWestOne bankers can help get you on the right track. Contact us at 800-247-4418 or visit us at any of our bank locations.
Editor’s note – this article was originally posted on this blog in March, 2015.