Budgets aren’t very fun. Creating a budget, while it is an important part of your financial health, is really not fun. However, if you are trying to save money for something specific…a house, a car, a trip…having a clear, well defined picture of your finances is key to achieving those goal.
Define your goals. Why are you creating this budget? Are you trying to reign in runaway spending, or are you saving for something in particular? Are you saving for a trip that’s six months out? Or are you saving up to purchase a home within the next few years? Maybe you are hoping to retire early. Writing down these goals will help make them seem a bit more real.
Know your income. What is your monthly salary? Do you receive regular bonuses? Own rental properties? What about regular investment dividends? Put these down in a spreadsheet and total up the monthly net amount.
Know your expenses. Start by making to categories for your expenses. Fixed expenses – mortgage, rent, utilities, car payments, student loans, etc. And Variable expenses – everything else. Try to categorize the variable expenses as best as you can… food, gas, entertainment, clothes, household, transportation, etc. List each group on your spreadsheet and average these for the last 3 months. Be sure to include any money you put towards retirement, savings and emergency funds.
Evaluate. Add all your fixed and variable expenses, including savings, Subtract that from your income and see where you are at. If you have a deficit, then you are spending too much. Figure out where you can adjust accordingly to balance things out. Evaluate each expense individually. Which ones can you reduce? Can any be eliminated? If you have a surplus, great job! Figure out the best place to put the money. If you are saving for something in particular, open a savings account specifically for that expense. Paying down debts; mortgage, student loans, credit cards, is another wise option.
Be realistic. Odds are you will not be able to save up for a large down payment on a house in 6 months. So, start with realistic goals and once you hit those, if you can do better, then do better. If you are completely miserable sticking to the budget, then allow yourself a little fun money every month. Just be sure to adjust your goals accordingly.
Re-evaluate. Every 3 months, sit down and see how you are doing. Are you cheating? Then readjust to compensate until you are back to where you should be. Take a look at which month you did the best and try to emulate the spending patterns there.
Your budget is a fluid, living thing that can and will change throughout the year, so continue to adjust and refine as you go along.