Making a Plan for Your Money

A budget is simply a plan for your money. Creating a budget and sticking to it can help you reach your goals. Everyone uses a budget in one form or another. We all have a general sense of how much money we have and what we can afford to spend. But writing down a budget is a good idea. It allows you to see the whole financial picture and decide how to prioritize your expenses and make the most of what you have. 

Creating a budget and sticking to it can be difficult, especially if you’re new to the process. Budgeting doesn’t mean removing all the fun from your life. It simply allows you to adjust your spending habits, look for other sources of income, and reduce expenses to give you more breathing room to live the life you want. 

Tracking Expenses 

Before you can create a truly useful budget, you need to know where all your money is being spent. Most of us are fully aware of how much we spend on the major expenses, like the mortgage and rent, but do you know how much you spend each week on snacks, drinks, and entertainment? It’s the small expenses that tend to accumulate and break our budgets. We carefully consider big purchases, like a new TV or cell phone, but we don’t give much thought to buying a bottle of water when we forget our reusable bottle at home.

Managing your money requires a balancing act between spending now and saving for later. To help stay on track with your spending, write down everything you spend money on for at least one week (a month is better), including the smallest purchases. Next, categorize your expenses into things you need versus things you want. Our spending log you can print to use at home will help you track your purchases. 

Building a Budget

Now that you know exactly how you are spending money; you can create an accurate and useful budget. For many people, budgeting is a scary word. And for some of those people, the idea of doing math is the scariest part. But budgeting is less about math and more about record keeping and self-control. The basics of budgeting are easy.

Think of budgeting as a living, breathing, ever-changing document of all the money coming in and going out. Keeping track of your money’s movement can help you avoid spending more than you earn. It can also help you plan for long- and short-term goals. Sometimes it can be hard to plan ahead, but doing so now can help you avoid the horrible feeling of NOT being able to make ends meet.

Income
To start a budget, write down your NET income. That’s how much money is left over after payroll deductions, such as taxes and health insurance. If your income is comprised of sources beyond your income—like child support—include those sources as well.

Expenses 
Next, document all your fixed and flexible expenses. Fixed expenses are the same every month, like your rent or mortgage. Flexible expenses vary from month to month, like your electric and grocery bills. When writing down your expenses, don’t forget to include bills you only pay a few times per year. Your list of expenses should also include debt payments and automated savings. 

Do the Math
Now it’s time to do the math by subtracting your total expenses from your total income. Ideally, you will have a surplus, meaning you’re spending less than you earn. But if there’s nothing left of your income or you’re spending more than you earn, then it’s time to examine your budget and make some adjustments. It’s perfectly common to learn that you are spending more than you make after completing your first budget. Try not to panic if this happens to you. You’ve just taken the first step toward improving your financial life. 

Use Your Budget
It’s not enough to simply make a budget. You need to USE it! A budget is a plan for your money. Make one at the beginning of each month. Track every expense. At the end of the month, compare what you actually spent and earned with what you planned. Use this information to help you plan the next month’s budget. 

If you’ve never budgeted before, a good way to start the process is by printing our budgeting worksheet and instruction guide.
 

Bad Budgets

If your budget isn’t working, take a look at some of these common problems. 

You left zero room for error. 
A lack of flexibility in your budget, especially when you first begin, is sure to lead to problems. Those problems can include emergencies. If your budget doesn’t include contributions to an emergency fund, make that change immediately! Once you solve that problem, add a little wiggle room to some other categories of your budget. Expenses tend to rise and fall, and your budget needs to be able to roll with the punches. If you spend less than normal one month, put the surplus into savings. It will come in handy the next time you go a little over budget. Learn more about emergency funds.  

You haven’t clearly defined your goals. 
Without goals, how can you possibly hope to prioritize your spending? Most budgets require some degree of sacrifice. Figure out what it is you want to accomplish with your money and work toward those goals. The rest of your expenses will likely need some trimming. If saving for higher education is a priority, how much do you really need to spend on entertainment? If your career aspirations require you to be up-to-speed on current events, maybe you do need cable, internet, and a daily newspaper, but do you also need to dine out for lunch every day of the week? Probably not. The key to creating achievable goals is to know yourself.

You forgot you have a personality. 
Are you a saver? Are you a spender? Your budget is unique. That’s why you can’t simply copy someone else’s. It should match your personality and lifestyle. If you are the sort of person who enjoys shopping and has a casual attitude about money, then be sure to build a cushion into your discretionary spending category. If your budget includes other people, such as a spouse and children, you’ll need to take into account all of their personalities as well.

You aren’t being honest with yourself. 
Once you commit to budgeting, you absolutely must keep track of every cent you spend, especially in the beginning. Until you have a realistic picture of your spending habits, you won’t know how much of your income should be devoted to each budget category. The place where most people slip up is with their “discretionary” spending. You probably have your rent or mortgage payment memorized down to the last penny. It’s likely our biggest bill each month, and paying it is required. But what about all those little purchases you make each day? A morning coffee, an afternoon snack, a trip to the movies with friends, or an impulse purchase on Amazon. Discretionary spending accounts for all the stuff you don’t need. It also accounts for all the stuff you are LIKELY to buy.  Be honest with yourself. These expenses often add up over time and can be detrimental to your budget and long-term financial goals. Keep good records of your spending the first few months you budget. It will help you identify problem areas and work to correct them.The spending logwill help you track your expenses and develop a more accurate budget.  

You didn’t pay yourself first. 
Saving for the future is an essential part of every budget. This can be hard when you’re barely making ends meet. It requires discipline. It also requires you to think beyond your need for immediate gratification. People naturally crave the “high of the buy.” Spending money now can make us feel good in the short term, but in a few years, when we really want something big, the money won’t be there. If you’re still working when you’re in your 80s, you’ll regret not paying yourself first. Set aside room in your budget for saving and investing, no matter how small, and work on growing that category over time. Learn more about investing.
 

Helpful Resources

Basics of Credit
Buying a Car
Buying a House
Preparing for the Unexpected