For many people, the idea of budgeting can be challenging. Days are taken up with work, friends, family and the energy and activities required just to manage your life. There never seems to be enough time to focus on finances. However, budgeting is really the foundation of everything in our financial lives. Developing a budget can do more than track your spending and savings. It can help you achieve your financial goals.
6 Steps for Creating a Realistic Budget
The following steps can help you build a budget that works for your life, so you can focus more attention on working toward your financial goals.
Step 1: Start With Your Goals
Take the time to think about your financial goals and actually write them down. They can be as simple as building up an emergency fund, saving for a new car or home, starting a college education fund for a child, or vowing to increase your retirement savings by 1% a year. Make sure the goals are measurable, so include the actual dollar amounts and time frames for reaching the goals. Here are two examples of measurable financial goals:
- Have a $1,000 emergency fund built up by April 1.
- Pay off $5,000 credit card debt in 18 months.
Divide the dollar amount by the number of months in your time frame to figure out your monthly goal. If your goal is to build up a $1,000 emergency fund in 6 months, your monthly goals is $1,000 divided by 6, which equals a $167 monthly contribution to the fund.
Step 2: Know Your Income
Before you can establish a budget, you have to know exactly how much money you have coming in every month from your employer and other sources. Make sure to include only the money you actually receive (for example, the exact amount of your net paycheck, not your gross pay before taxes and other deductions).
Step 3: Total Your Monthly Expenses
You can’t budget until you know how much money you’re spending each month. When figuring out your monthly expense number, be sure to include the following:
- Groceries
- Rent or Mortgage
- Car loan payment
- Cable/Broadcast provider payment
- Credit card payment(s)
- Cell phone service
- Student loan payment
- Entertainment and eating out
Also remember to include occasional expenses such as doctor and dentist visits as well as car and other insurance payments. It’s also important to look through past bank and credit card statements to get a realistic picture of your spending. Make sure you don’t have any automatic debts to your account that you no longer use or don’t want to use!
Step 4: Create a Realistic Budget
To take your first stab at a budget, add your monthly expenses from Step 3 to the monthly goals you calculated in Step 1. Then, subtract that total from your monthly income calculated in Step 2. If the balance is positive, you’ve created a budget that works for your current lifestyle. Here’s an example:
- Monthly income (from Step 2) $3,000
- Monthly living expenses (from Step 3) $2,100
- Monthly financial goals (from Step 1) $750
- Total left over $150
If the balance is negative, you have some more work to do.
Step 5: Revisit Your Goals and Expenses
If the first swipe at your budget came out negative, rework the numbers and try again. For example, you can revisit expenses and decide which ones are top priority and need to stay in your budget and which you can do without. You can also consider changing the amount of time needed to meet your financial goals. Or you can figure out a way to increase your income.
Step 6: Stay Connected
Budgeting isn’t a one-and-done exercise. To help you move forward in your budgeting process, check out www.americasaves.org. The site features lots of money-saving ideas, as well as other tips on setting financial goals and making a plan to achieve them.