If you’re like many people, you may promise yourself each year that you’re going to create a budget and stick to it. The reality is that many of us just never get around to it because we think it’s too time-consuming or too hard.
In reality, it’s harder and more time-consuming to manage your finances when you don’t have a budget. Without a budget, you never really know how much money is coming in and, more importantly, where it’s all going. Not sure where to start? Follow these easy steps to get started.
Step 1: Make a list of all your income sources. Be sure to include all forms of net income—including your spouse’s/partner’s pay, if applicable.
Step 2: Make a list of your fixed and variable expenses. Fixed expenses are ones you incur on a monthly basis and which stay relatively the same, such as mortgage and car payments, auto insurance, student loans, groceries, etc. For variable expenses, which can change from month to month, be sure to include things like utilities (e.g., gas, electric, heating, phone, etc.), clothes, dry cleaning, gasoline, entertainment, vacations, dining out, and gifts.
Step 3: Determine how much debt you have. Pull copies of all your credit card statements for the past six to 12 months to see how much debt you are currently carrying and how much you are paying back each month.
Step 4: Total your monthly income and expenses. If your end result shows you have more income than expenses, then you’re off to a good start. That means you can use any overage to pay down existing credit card debt and potentially save more in your emergency fund or for retirement. If your expenses are higher than your income, you may need to make some changes. Start by looking at your variable expenses to see which ones can be cut or scaled back. For example, do you really need to spend $3 for a coffee each morning before you head to work? That could add up to $60 or more each month.
Step 5: Review your budget every few months and make adjustments. You may need to add additional fixed and variable expenses during the course of the year to account for new expenses that may pop up. And as you hopefully reduce your debt, continue to save what you’d been spending on repaying your debt.
Taking the time to create a realistic budget will help you see exactly what you are spending your money on and where you can scale back, if necessary.
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