If you cringe at the mention of a budget, you probably don’t have one. Because if you did have a budget — a workable one, I mean — you’d sing its praises. A budget not only makes ends meet, but can (and should) bring you closer to realizing more long-term financial goals.
Bottom line, if you don’t have a budget you need one. Here’s how to make it good.
Step 1: Track your spending for a month.
The only way of knowing how to improve the way you’re spending money is to know where you’re money is currently going. While you certainly have a general idea of what you spend on things, most people underestimate.
Every day for the next 30 days, record every single expense under one of the following categories (and/or whatever categories present themselves during the tracking process):
- Homeowner’s or renter’s insurance
- Household (misc)
- Home office
- Personal care
- Life insurance
Using an Excel spreadsheet is recommended, but you can just as effectively track your spending in a notebook, with a separate page devoted to each category.
Step 2: Compare your monthly expenses to your monthly income.
Add up what you spent in each category. Then add up all of the categories for one grand total of spending for the month. Subtract this amount from your monthly income. If it comes up negative, you need to shave at least that much off your budget. If it comes up positive (i.e., you’re bringing in more than you’re spending), then you’re starting with a good foundation.
Step 3: Determine your financial goals.
Do you want to pay off your credit cards? Do you want to build up enough in emergency savings to cover living expenses for six months? Do you want to save for the purchase of a big-ticket item or a trip? Do you want to start a retirement fund?
However much you want to invest in any of the above, or the like, is how much you need to shave off your budget.
Step 4: Lower your spending limits, by category.
Add up the amount needed to meet your targeted financial goals. Go through each category and slash spending where you can until you have subtracted as much from your spending as necessary to meet your financial goals.
Step 5: Spend according to your budget.
For the next 30 days, limit yourself to the amounts allotted for each spending category. Categories representing set expenses will be a breeze, like your mortgage and homeowner’s insurance. Most, though, will require some real discipline, particularly food and entertainment.
Step 6: Make necessary adjustments.
If you find it absolutely necessary to go over in any one category, that’s fine. Creating a workable budget takes time, and that means trial and error. You may find that you spent less than expected in one of your other categories though, so just shuffle things around accordingly. If not, then you just might need to revisit your financial goals and lower your expectations, at least for now.