Most people know they need a household budget. But actually creating one — and then sticking with it — can be difficult. It’s easy to let an unexpected expense or the desire to go on a trip make a hole in your budget if you’re not prepared. There are, however, a few basic elements to budgeting that can help you stay the course while still enjoying your life. Here’s a step-by-step guide:
Step 1: Organize
At its core, a budget tracks two things — your income and your expenses. Start by gathering your financial documents, such as pay stubs, credit card and bank account statements, and auto or student loan bills, to ensure you have enough information to begin tracking the money coming in and going out.
Step 2: Track
For one month, keep a detailed log of all your spending habits. Track all your expenses, from regular monthly items, such as car, rent, mortgage, or credit card payments down to the small variable pieces, such as the amount you spend on daily lunches. Consider using online tools, such as Budget Watch, to automate the process of tracking your spending and setting up budget goals. If you’ve been paying your bills and direct-depositing your paychecks all within the same account, you can use your account history online to help you see regular patterns or estimate what you spend every month on items that can vary, like electricity.
Step 3: Analyze
At the end of the month, subtract your total expenses from your total income. If your expenses add up to less than your income, you’re on the right track. If not, examine your spending with two questions in mind: “What can I do without?” and “What’s really important?”
Step 4: React
After looking at all your expenses, separate them into categories and set a budget for each. If you think you spend too much in a given area, set a goal that will require you to actively cut back. To prepare for the future, make sure you have at least one category for saving — if you don’t have an emergency fund, work on creating that with your savings so that you don’t break your budget if your car requires an expensive repair or you encounter a health care need. You could also create categories for vacations or other special occasions so that you feel more confident taking a trip, knowing it won’t derail your budget plans.
Step 5: Review
Make a habit of reviewing your budget every month. You may also benefit from a qualified second opinion. That could come from a trusted friend or relative who’s skillful with spending and saving. It could also come from an experienced financial planning professional who can review your budget, offer suggestions, and help answer questions.
There will be emergencies and events that may divert you off your target every once in a while. But if you make budgeting a lifetime habit, and always try to set aside some money to save, you’ll be better positioned to react to those unexpected expenses and keep on your financial path.