10 Steps To Making A Budget
Creating — and sticking to — a household budget is the cornerstone of a sound personal financial plan. Here’s how to make one in 10 simple steps
- Pick a system.There’s no shortage of budgeting apps and online tools available. You can also use a basic electronic spreadsheet or even pen and paper, if you prefer. But whatever your approach, select a convenient and flexible system to capture and categorize your income and expenses over time.
- Track current spending.Keep track of everything you buy for a month to have a realistic picture of your spending before you start. It can be surprising how many purchases occur under your radar — like that occasional latte, magazine or fast-food lunch.
- Log Your Income.Record income from your job and any other sources, like a side hustle building websites or selling handmade jewelry on Etsy. Don’t forget to include investment or retirement income as well.
- Record Fixed Expenses. These are costs that remain relatively stable over time — things like your mortgage, insurance premiums or car payment.
- Project Variable Expenses.These change from month to month. They might include things like gas, takeout dinners and clothing purchases. Credit card payments tend to also fall into this category. Look at your average over the two previous months for a ballpark, but always err on the high side when it comes to budgeting for them.
- Include Occasional Expenses.Some expenses only come up from time to time. They can be predictable (like your summer vacation) or unpredictable (like a car repair). Either way, it’s important to budget for expected and unexpected occasional expenses. To do this, take the total estimated cost, divide by 12, and include that amount into your monthly budget.
- Emergency Fund Savings.Aim to set aside at least 3-6 months’ worth of expenses in a highly-liquid savings vehicle like an FDIC-insured bank account (some advisors suggest 12 months depending on whether you own a home, are married or have children). Clearly, this can take time to build up, so if you don’t yet have enough saved for a rainy day, budget regular contributions to an emergency fund.
- Retirement Savings.Sit down with your financial advisor, who can help you determine how much you’ll need to save in your 401(k) and other retirement accounts each month to stay on track to achieve your retirement goals. It’s important to “pay yourself first” when it comes to funding your future — and your budget should reflect this important priority.
- Plan for Windfalls.Decide ahead of time what you’ll do with an increase in pay, tax refund, gift, bonus or other found money. Having a plan reduces the likelihood of an impulse buy. Consider using most of it to bolster your retirement fund or pay down debt.
- Monitor and Periodically Re-evaluate.It’s important to reexamine your budget regularly and whenever your financial circumstances change. Depending on your situation, that could be quarterly, semi-annually or annually.
Don’t be hard on yourself if it’s difficult to stick to your budget each and every month. You may need to make some adjustments from time to time. The most important thing is to keep trying to meet your spending and saving targets. If you need help determining a realistic budget for your situation, make an appointment with a financial advisor who can assist you.