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4 Steps to Better Budgeting

“Where did all my money go?” If you find yourself asking that question at the end of every month or in the days before your next paycheck, it’s time to get your budget in shape. Don’t have a budget? No problem! It’s easy to get started. Once you’ve got the hang of it, your finances should be easier to manage and you’ll have a better chance of achieving your short- and long-term goals.  

Step 1: Figure Out Your Goals

What are your dreams for the next few months? How about the next few years? Are you planning to further your education, get a new car or buy your first house? Write down the plans that are the most important to you, along with a realistic guess of how long it will take you to get there. Keep this list handy, we’ll return to it in another step.  

Step 2: Calculate Your Income and Expenses 

In a budget, your monthly income is the amount you take home in each paycheck (not your total annual salary), as well as other amounts you may receive regularly, like freelance income, investment dividends, interest and child support. That’s what you’ve got to spend. Next, add up your regular monthly expenses. Include the cost of housing, utilities, childcare, phone and Internet service, food, student loans, insurance, and transportation or commuting costs, and any other regular bills. Next come the discretionary expenses, or those that are optional or flexible. Your discretionary items include entertainment, dining out, vacations, hobbies, etc. Don’t forget to anticipate costs that aren’t monthly but pop up regularly, like car maintenance, home repair and holiday spending. To refresh your memory, review your bank statements and receipts to identify expenses you may have left out.  

Step 3: See What’s Left 

Once subtract your monthly expenses from your monthly income, it’s time to decide how to spend what’s left. Look back to the goals you identified in Step 1. Let’s say your income is $3,000 a month and your expenses are $2,600. With the remaining $400, you could save $100 each month for a new home, and deposit another $100 in a tax-advantaged retirement savings account. Whatever your choices, your budget can help you take control of your financial future.   

If your monthly expenses are more than your monthly income, you’ll need to revise your spending habits so you can live within your means. Review your list of discretionary expenses and see if it’s possible to cut back by, say, eating out less or spending less on vacations or costly hobbies. This type of assessment and spending readjustment can help you enjoy the money you have without worrying about running up debt.    

Step 4: Monitor Your Budget 

Your income, expenses and spending habits will change over time, so it’s important to monitor your budget. Ask yourself: 

  1. Am I still following it? 
  2. Are there any revisions needed based on other changes in my life? 

The overall goal is not to worry about everything you spend, but to be aware of how much you have available to spend. That said, as an experiment, consider tracking all your spending for one week, or even a month. You may be surprised by what you find and spot some easy ways to cut costs.  

Best Practices  

Budgeting doesn’t have to feel like a chore. Here are some ways to make budgeting easier and more effective:  

  • Make it a team effort by getting the whole family involved. Explain the importance of budgeting and ask for ideas on cost-cutting and other helpful steps.  
  • Don’t get started on your budget at a time when it’s going to be difficult to stay disciplined. Begin in January rather than right before the holiday spending season or right after a vacation. That way you won’t be discouraged if you bust your budget in the first month.  
  • Use the system that’s best for you, whether on paper or using budgeting software.  
  • Reward yourself for a staying on budget by indulging in an inexpensive splurge.