Most people know that a budget is an important step toward achieving financial security. However, establishing a budget is hard work, and sticking to one is even more difficult. Fortunately, there are simple steps you can take to improve your chance of success. The following tips can help.
#1 – Calculate your money in versus money out.
The first step in establishing a budget is to understand how much money you have coming in each month versus how much money you spend. Start by adding up your monthly household income from all sources. This should be the net amount you receive after taxes and other payroll deductions. Make note of this amount.
Next, take time to track and categorize your monthly expenses. You may need to go back several months to gain a full picture of your spending over time, especially if there are bills you pay less frequently than monthly. Break down your monthly expenses into the following categories:
- Fixed expenses – Mortgage or rent, car payments, student loan payments, medical premiums, etc.
- Non-discretionary variable expenses – Groceries, gas, medical expenses (such as copays and deductibles), utilities, etc.
- Discretionary variable expenses – Entertainment, concert/sporting events, eating out, travel, gifts, etc.
- Periodic expenses – Insurance payments, annual membership fees, tuition payments, etc. (calculated as a monthly expense)
- Savings – Any amount you regularly contribute to savings that is not automatically deducted from your paycheck
Compare your average monthly spending to the amount you bring in. Are you spending less than you earn? If not, you may need to make some adjustments. Start by looking at your discretionary variable spending. Where can you cut back? Maybe you realize that you are eating out four times a week. Cutting back to just once a week can give you more room in your budget. Or you may choose to take a vacation within driving distance to save money on airfare.
The key is to establish a balance between saving and spending that allows you to enjoy life today while also setting aside money for the future.
#2 – Do not jump into large purchases … or small ones.
Before committing to a large purchase, such as a vacation or a new car, take some time to consider how the purchase may impact your long-term financial goals. Will a monthly car loan fit into your monthly budget? What other expenses may accompany that purchase (such as maintenance, gas, insurance and registration fees)? Will you have enough money left over each month to put toward other goals, such as retirement or a home purchase? Will the purchase enrich your daily life or add stress to it? Taking time to consider a large purchase’s impact on your life can give you valuable insight into whether it is in line with your priorities and long-term goals.
While smaller purchase are not as financially impactful as large ones, it is still wise to practice financial discipline and avoid impulse buys. For example, if you are shopping online, consider letting something sit in your cart for a few days before buying it. If you continue to think about it for three to four days and the cost fits within your budget, go ahead and buy it. However, you may be surprised to realize that you no longer want the item after a few days. You may even forget about it completely.
#3 – Pay with cash.
When you force yourself to make purchases with cash, you are more likely to experience the pain of parting with your hard-earned money. This is a good thing, as it can help you keep your spending in check. Try using only cash for a month and see if it has an impact on how much you spend.
#4 – Automate your savings.
A great way to stick to your budget is by establishing automatic transfers from your checking account to your savings account. Just the simple act of transferring money out of your immediate reach can help you remain disciplined about your spending.
#5 – Plan ahead.
While it is impossible to plan for all expenses, you can plan ahead for some financial responsibilities. Take time each month to identify any upcoming expenses, such as birthdays, holidays, vacations, weddings, etc., and adjust your budget accordingly. You may need to cut back a little this month in order to save for a big event next month. Taking time to plan ahead can help keep you on track. Could you use some help establishing (and sticking to!) a budget? We would love to have a conversation. To learn more about how United Capital Financial Advisors can help you plan for the future, please contact us.
