How to Make and Maintain a Budget
You may already know that budgeting is an essential tool to help you live within your means and save for important life events. Yet you may not have a budget in place to manage your spending and saving. It may seem like too much trouble, but it’s not that hard to create and stick to a budget. Consider these budgeting tips and give it a shot:
Tally your monthly income.
Your monthly net income forms the framework for your budget because it sets the boundaries for spending. That’s why it’s important to understand exactly what you earn. Your paystub is actually a valuable financial planning tool. Examine tax withholding, healthcare, and 401(k) deductions to be sure you’ve got the right balance of savings and net income for your situation. When calculating your total income, make sure to consider all sources, including tips, interest, dividends, rental income, etc.
Find out where your money is going.
Make an accurate assessment of your cash flow. Take time to write down your current living expenses or arrange them in a spreadsheet. Itemizing your bills and laying out your expenses gives you a clearer view of your financial picture. After all, you can’t determine where to save money until you know what you’re spending.
Prioritize your spending.
After you’ve itemized your expenses, categorize them to better direct your money to the most important aspects of your life:
Necessary – expenses that are critical to your way of life, like mortgage payments, taxes, healthcare costs, utilities, groceries, etc.
Goal-oriented – money you dedicate to paying off loans, building an emergency fund, or saving for specific goals – this kind of spending may ultimately benefit your bottom line.
Discretionary – money you spend or save after necessary expenses and savings goals have been met.
Be honest with yourself and don’t confuse luxuries with essentials needs. A common rule of thumb is to limit payment of expenses to 90% of your income, leaving 10% for savings. However, your individual circumstances will guide you to a realistic breakdown within which you can budget.
Don't lose focus over time.
Budgeting is a commitment, not a one-time task. Income and expenses change in the course of a year, so you should monitor how you’re doing. If your income increases, keep your spending in check and consider allocating more to savings. If your expenses go up, you’ll need to re-evaluate and make adjustments. Beware of rising discretionary spending, as that will surely derail your budget. Remember the reasons you started budgeting in the first place to keep your savings goals on track.
Let digital tools do the math.
There are many financial programs and online tools available today that take the work and worry out of the budgeting process. They not only make it easier to crunch the numbers, but they also aid in monitoring your budget as time goes on.