While creating a budget (and sticking with it) takes time and discipline, it can be empowering. With a budget, we become aware of how much money we’re bringing in, where it’s going and what adjustments we need to make to reach our financial goals. These tips from U.S. News and World Report and personal finance blog Wise Bread simplify the process of creating a budget.
- Have a goal. Knowing why you are trying to save money can help motivate you. Are you saving up for a house? Perhaps you’re hoping to sock away some funds for retirement or your child’s college tuition?
- Track how much money is coming in every month. Add up all sources of after-tax income so you have a clear picture of how much money is coming in monthly.
- Track how much money is going out. Next, keep track of your monthly expenses, which are usually fixed or variable. Fixed expenses are constant and predictable. Rent is an example of a fixed expense. Variable expenses aren’t constant – for example, entertainment, travel and clothing are variable expenses. (It’s easier to start cutting costs from variable expenses, instead of fixed expenses.)
- Reconcile the numbers. If you’re spending more than you are bringing in, it’s time to look more closely at your finances and make adjustments. Ask yourself questions, such as what expenses you can reduce. (Start first with your variable expenses. If you still have a budget shortfall, move on to your fixed expenses.) Differentiate between your wants and needs. Anything beyond food, shelter, basic clothing, and transportation, for example, would be a want. Also consider ways you can make more money or other strategies, such as comparison shopping before making a purchase. In addition, be sure to read 10 Tips for Frugal Living.
Investing a little time in making a budget can reap dividends down the road when it comes to your financial security and peace of mind.