Set a Budget that Works
Is today the day that you take charge of your financial life? Job one is developing a strategy- and that means laying all of your financial cards out on the table in support of setting a budget that is relevant, reasonable and supportive to your goals.
Set a Goal
Beyond just wanted to have more money saved, more money to spend and less debt, set an actual goal- associated with a timeline (like “I’d like to be debt-free in a year” or “I would like to put extra money aside to pay for a family vacation this summer”).
Goals matter- not just for motivation, but for measurement of success, and for concrete acknowledgement when milestones are reached.
How much do you Earn?
List your net income (after taxes) that will be available to meet your spending requirements month-to-month. Also note the frequency of your pay (monthly, bi-weekly) and the regularity (are you a salaried or hourly employee?).
If you are an hourly employee, do you have regular hours? Take the last few pay stubs you have, and do an average calculation for the time period. For the sake of budgeting, go low on the income, so as not to spread yourself too thin.
Now you know what you are bringing in. What is going out in order to pay for household expenses? List everything, rent/mortgage, groceries, gas, clothing, entertainment, heat/hydro, water, cable etc., credit card payments, loan payments etc.
This is done more effectively if you have receipts to substantiate your calculations (i.e. your grocery orders for the last month, recent bills etc.)
Track, track, track
There are numerous online budget tools (a quick search will reveal many that are free) – or you can even use a simple spreadsheet.
List all of your spending by expense category and then determine what your total expenses are vs. what you’ve got coming in every month.
Make sure as the budget goes along over time that you track your expenses. If you don’t, you won’t have an accurate picture of what’s going on, and you won’t properly know where to make adjustments if necessary.
Current picture vs. your goal.
How do your expenses match up against your income? Is there any extra cash left over that you could direct into savings for your goal or towards more aggressively paying down debt?
If there is a shortfall, you need to re-examine the numbers to see if there are areas in which you can tweak or shave down.
You also need to determine how much money you’d need on a monthly basis to reach your desired goal. Is it reasonable over the time frame that you’ve set out for yourself?
If your budget doesn’t look so rosy, what are you going to do about it?
Are there areas in your budget that you can trim (i.e. entertainment and clothing are usually the first to go). Try quick fixes like turning down the thermostat, carpooling to work and brown bagging it instead of eating out.
Do you have numerous small debts? It might be worth investigating the possibility of consolidating all of your debt into one place (either in an installment loan, or transfer high-interest balances onto a low-interest credit card or line of credit).
The problem with numerous debts is that you are paying large sums of interests without taking a serious bite out of the actual debt. Consolidating may free up cash flow to direct to other financial initiatives.
Plan to revisit
The best way to keep your budget on track is to revisit it frequently in the short term to make sure that it will stick in the long term. Maybe your numbers are off, or your situation changes over time. You need to be flexible and accommodate for the fact that you are still planning on living your life, and the expenses associated with it- while trying to stick to your budget.