The word “budget” may have a bad reputation, but that doesn’t mean it’s a scary thing. Being on a budget can empower you to get out of debt, live within your means and ultimately achieve financial health. Creating a budget isn’t just for people who are having a hard time making it from month to month. It’s an essential way of taking charge of your finances. After you create a budget breakdown, it is easier to meet bigger financial goals, stretch your monthly income further and save money.
Set Budget Breakdown Goals
First, it’s important to be clear on what your purpose is for creating your home budget. No matter where you are in life and what responsibilities you’re shouldering, there is room for positive changes. Nevertheless, try to keep your goals small and manageable at first. When you reach your initial goals, you can always aim higher. It’s more motivating to reach small goals than to be consistently trying to reach an unattainable one.
One common budget breakdown goal is creating a $1,000 emergency fund so that you don’t have to stress if you have a small emergency in your life. Other common, small-scale budget goals include saving to buy a new smartphone, amassing a vacation fund or saving for a new computer. If you think you’ll only be encouraged by setting higher goals, big budget goals include saving for a down payment to buy a house and investing a significant amount in a retirement plan. Make a note of how much you need to save each month to achieve your initial goals.
Determine Your Total Net Income
Decide how you are going to make your budget. If you are going to pool the income that you and your spouse earn together for your budget, determine how much you both make overall after taxes are deducted. If you are only doing a home budget based on your income, only include your take-home pay from work. Only count your spouse’s monthly contributions if you can count on it as part of the monthly budget the family has. Then add the interest you may earn from savings accounts, any income from rental properties and income from all investments. If you have your own business, you may not be able to count on a set income every month. However, the best plan is to take the average of your earnings over a few months.
Record Your Daily Expenses
Before you can determine how much you should be spending every month, you need to see how much you’re currently spending. Keep track of a breakdown of expenses throughout two to three months. Be dedicated and relentless about this. You can dedicate a notebook to this task if you prefer having a tangible journal or keep track in an online worksheet. Just make sure you make an entry every single time you spend money on anything. Make sure all members of your family do the same, or insist on being the one to dole out all the funds while you are tracking your expenses for the budget.
Your daily expenses should include everything. From your mortgage payment with interest to the school lunch money you give your kids; write it all down. Software programs can help you track daily expenses if you have a hard time recording and organizing them yourself.
Assess Your Expenses
After recording your expenses for a few months, set aside a weekend for going over your records. If you and your spouse are working on the budget together, do this together as a team. Look over all the expenses you have on a day-to-day basis and make mutual decisions about which expenses are essential and which ones are extra expenses. Acknowledging that an expense isn’t necessary doesn’t mean that you are going to stop indulging in something you enjoy. It’s just that you need to be clear about how your money is being spent.
This is the part where your budget percentages may surprise you. You may feel like you are only spending money on necessities when, in reality, a big chunk of your budget may be going towards things that are extras. Facing reality about which items are necessities can empower you to make better choices and to make some decisions based on delayed gratification. For example, if you want to start getting massages, you may see that you would rather allocate funds for that indulgence than buying coffee on the way to work each day. By making coffee at home instead, you may find that you’ll free up money to get regular massages.
Make two spreadsheets for your expenses for the most recent month. Dedicate one to necessary expenses. Dedicate the other one to extra expenses. Make sure all the necessary monthly expenses are recorded on the appropriate spreadsheet. Add all the necessary expenses, then subtract that from your monthly income. You may be surprised at how much, or how little is left over.
Next, subtract your extra expenses from your income. If you find that you are spending too much on extra expenses, first take another look at your necessary expenses. Make sure that every expense you recorded on the sheet for necessary expenses are true necessities. If not, move those items to the sheet for extra expenses. After you do this check-up on your choices, look at your sheet of extra expenses. If you and your spouse both seem to be overspending, you may opt to make a rule that each of you will choose one extra expense to give up for the first month of the budget. Otherwise, simply look over the sheet and determine which things you can do without. You don’t have to follow the budget and do without these things forever. However, it’s a good idea to try to cut as much stuff out as you can in the first month of a budget.
Look Over Your Goals
See how much money you have left after your necessary and extra expenses. Determine whether you have enough money left over each month to meet the financial goals you set. If not, you may need to look at other ways you can cut back on your spending. That may include changing how you meet a necessary expense. For example, if you get the highest-speed internet and cable combo package for your area, you may decide that only the internet is an essential expense for your work. Cable is just for fun. You may opt to get rid of cable, thus saving money that you’d previously allocated as a necessary expense.
Strive to adjust your outgoing expenses until you are on track to meet your initial goals. After the first couple of months, it’s important to make sure that you have money left over to save towards both short-term and long-term financial goals each month. Your budget should be your financial best friend. It should serve as a guide to help you get the most out of the money you earn. A budget is meant to be flexible as life changes but to give you a basic idea of where your money is going every month. Facing the truth about where you’re spending the majority of your money can empower you to make smarter, more efficient financial choices.
Robin Raven is an experienced journalist and author. She has a BFA in writing from the School of Visual Arts and loves to write about personal finance. She has contributed to USAToday.com, The Huffington Post, The Nest, Grok Nation, and many other publications.