Does the word ‘budget’ sound intimidating to you? Does the thought of creating a budget make your palms sweaty and your heart beat a little faster? While that is a common reaction, it really isn’t necessary to feel afraid of a budget. Actually, in reality a budget can be your best friend in evaluating your money habits and achieving your financial goals. When you break it down into simple steps, implementing a budget doesn’t have to be scary at all.
Identify Your Income
Your income is the amount of money that comes in over the course of a month. This is the amount that lands in your bank account when you get paid. You may have a job, two jobs, or a few side jobs. Just add up the amount that gets deposited every month and that will serve as the amount that you have to spend. If this is variable month-to-month, just use an average from several typical months to estimate the actual amount.
Estimate Your Expenses
Once you know how much you have available to spend, you can decide how to allocate the money available to you. First, consider how much money you need to allocate for mandatory spending categories, such as housing (mortgage or rent), utilities, taxes, food, gasoline, and repayment of debts (auto loans, student loans, or other personal loans). These are the bills you have to pay every month or face the consequences. Then there are the discretionary expenses, like clothing, entertainment, eating out, vacation, gifts, and savings. The amount of money you choose to spend on these categories is a little more flexible based on your individual priorities and how much money you have after paying for your fixed expenses.
Record It All
For each category, you should find the amount you will spend (if it is always the same) or estimate the amount you predict you will spend. When creating a budget, the best way to predict the amount you will spend in the future is to look at how much you’ve spent in the past. To make a good prediction, take an average of the amount that you’ve spent over the past 2 or 3 months. Then record all this data in a spreadsheet where you will have it available for you to consult as you are making spending decisions.
Balance Your Budget
The next step is the hard part (or the fun part depending on your perspective). You have to make sure that your budget is balanced. In other words, you have to make sure that your expenses are less than your income. If you have more money going out than money coming in, your budget will not work. You will be falling further and further into debt each month. So if you have more expenses than income, you can either get another job to increase your income or you can reduce your spending. Look at each category to see where you can cut expenses. You may want to spend $300/month on clothing, but you can probably find a way to reduce that number to $100/month. You may think you need to have $400 to eat out each month, but you could make some lifestyle changes and reduce that number by half. Each individual will have some expenses that are more important than others. Your budget will reflect your priorities.
Compare Your Budget to Reality
Once you have a balanced budget, you’re not done. Now you need to track your actual spending. If you do this in real time, you can see what you have spent and how much money is left in each category. Looking at where your spending compares to the amount you’ve budgeted can help you make good spending decisions. Once you have spent all the money that has been allocated in a category, you’ll need to be disciplined and stop spending.
Adjust Your Budget
Creating your budget is not meant to be done once and forgotten. It should be changing constantly to reflect changes in needs or priorities and adjustments for unexpected expenses and increases in income. Record every dollar you spend so that you can be assured that you are spending money as you planned. Then adjust as needed. Updating your budget with actual expenses will help you make the changes that will allow your budget to work for you and accomplish the financial goals that you have. And remember that the convenient tools that Federated Bank offers, like mobile banking and online and mobile Bill Pay, can help you stay on top of your spending, making your budget work even better for you!
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