A budget plays a crucial role in reaching your financial goals. A 2015 Bankrate study surveyed 1,001 Americans and found while many have a budget, less than 40% of respondents have cash to handle a substantial cost outside their budget.* Proper budgeting can make saving for these emergency expenses possible. Without the guidelines of how much you should save vs. spend, you may find yourself seeking direction.
Everyone must start somewhere, so we’ve put together a step-by-step list of how to create a successful budget tailored to your lifestyle.
1. Gather your financial information.
Before you can create a successful budget, you need to understand your current financial picture. Gather as many account statements as you can: bank, credit cards, investments, utility bills, and information regarding income. These pieces of information will give you the best snapshot of your saving and spending habits.
2. Compile a list of your sources of income and expenses.
Using the materials you gathered regarding sources of income, make a list of the amount coming in each month; your total monthly income. You may be taking in more than just traditional income, such as dividends from investments, so be sure you’re recording all other forms of income, as well.
Next, look at what you’re spending regularly each month and split your expenses into two categories: fixed and variable. Fixed expenses remain consistent from month to month (i.e. mortgage/rent, car payments, cable/Internet). Variable expenses may change from month to month (i.e. groceries, entertainment, gas); you’ll have the most room for adjustment with these expenses.
3. Compare your monthly expenses and income.
Now that you have a snapshot of your monthly financial picture, compare your total monthly income to your total monthly expenses. If your income is greater than your expenses, you’re off to a great start. However, if you find your expenses are greater than your income, you will need to make some adjustments. It’s important to live within your means and not overspend.
4. Create your budget.
With this information on hand, ask yourself: what are my goals for this budget? For example, depending on your age, you may want to save more each month for retirement. Or, you may want to focus on paying down any high interest debt. You should also consider having enough savings to cover a potential emergency. No matter the goal, you have the flexibility to create a budget that helps you work toward them.
Once you’ve established what you want to accomplish, you can calculate how much you should allocate for fixed expenses each month, and how much you should cut from your variable expenses, in order reach your goal. Be sure to factor in the amount you plan to put in savings each month, as well.
You can choose to keep track of your budget the old-fashioned way – with pen and paper – or, utilize budgeting websites or smartphone apps. It doesn’t matter what form you choose to track your budget, as long as you are able to access, understand, and use it.
5. Share your budget with your household.
You shouldn’t be the only member of your household concerned with your monthly budget. A budget is useless if you’re the only one sticking to it. If you live with a significant other, include them in the process. Even involving your children can be beneficial in teaching them positive financial practices for the future. If everyone cuts back a little, it will make a difference.
It’s unrealistic to think you can follow your budget 100% all the time. So, if you overspend one month, don’t dwell on it and get right back on track for next month. Join the 60% who are able to save their money for a rainy day by staying true to your budget and practicing careful spending! Before you know it, you’ll be much closer to financial freedom.