The word "budget" has practically become a dirty word in our consumption-crazy culture, but a monthly budget is an important component of a good financial plan. The reason it's so important is because it provides a spending plan for your money before you spend it. When you have a budget, you can easily determine where you're spending too much and make adjustments to free up cash for important things like investing for retirement, building up a savings account, or paying off debts.
Pulling together a budget is pretty straightforward, but it does take a little time upfront to create and additional time on an ongoing basis to refine. But it's well worth the effort! Before you can find a route to your destination, you've got to know where you're starting from, right? A budget can help you figure out where you stand financially now and play an important role in helping your reach your financial goals.
One thing I highly recommend before creating a budget is to take the time to really understand your "why". It can be tough to stick with a spending plan, so it's important you have a strong "why" for creating it to begin with. Is it to take a trip at the end of the year? Pay for college? Build up your retirement? Take the time to understand what goals you want to achieve with the budget before you attempt to create one. The stronger your "why" the more likely you'll stick to your budget even when it's tough.
Start By Listing Your Expenses
The first step in creating a budget is to make a list of everything you spend money on throughout the year, whether it's electricity, gas, car payments, clothing, eating out, entertainment, etc. Make sure to include any overdraft fees or late charges you've paid as well. Take the time to really think through where your money goes. Check registers, bank statements, and credit card statements can be helpful for this. If you use software like Quicken to manage your bank accounts, this could be as simple as running a report.
When my wife and I did this for the first time, we were blown away at how much we were spending in certain areas. Folks, this is a huge reason why this process is so important and valuable! Taking a hard look at what you're spending your money on is the first step towards getting your spending under control - which is the whole point of budgeting in the first place, right? One of the biggest reasons we often overspend is simply because we don't know how much we're really spending on certain things.
Once you've figured out the total amount you're spending money on for various expenses during the year, break everything down into a monthly expense. Some expenses are already paid on a monthly basis, such as rent, house payment, electricity, etc. Figure out the average amount you pay for these on a monthly basis and include that in your budget.
Other expenses are only paid once or twice per year, such as car registration fees, life insurance premiums, homeowners insurance, etc. Divide what you pay per year by 12 to arrive at a monthly amount you can include in your budget. By doing this, your budget automatically "plans" for these expenses so that you have the cash on hand to pay them when they come due. For example, my wife and I have to pay yearly fees to register our cars, so even though they're only paid once per year, we break them down into a monthly expense and include them in our budget so we automatically have the cash set aside when the fees come due.
Cut Out the Fat
Once you've listed out your expenses and have them broken down into a monthly average amount, it's time to figure out where you're overspending. Go through each expense listed and note which ones are mandatory and which ones are at least somewhat discretionary. Mandatory expenses are things like the light bill, gas, house payments, car payments, insurance, etc. You don't have as much control over those spending items (though it would be worth figuring out if there's a way you could reduce them). The discretionary stuff, like eating out, groceries, entertainment, etc., you do have at least some control over. These are the ones you want to target to see if you can reduce your spending. There may even be a few items you'll want to stop spending on altogether.
Go through your entire list and set a reasonable budget number for each, making sure that your total spending is less than or equal to your monthly income. Don't worry about getting it perfect the first time! Budgeting is a process, and it will probably take you a few months to fine tune your numbers.
Implementing Your Budget
Once you've pulled together your initial spending plan, it's time to put it into action. This often is the most difficult part, so it may not be a bad idea to build in a reward for hitting or coming in below budget at the end of the month. If you like to eat out or buy new clothes, consider adding that into your budget as a reward if you hit your spending targets.
If your numbers end up being way off the first few months, don't give yourself a hard time about it. Simply refine and repeat until you have a budget that works for your situation. Make sure you monitor your spending throughout the month so you can make any necessary adjustments to meet your monthly budget number.
Conclusion
As I've discussed, a budget can be created in three simple steps: 1) list your expenses, 2) cut out excess spending, and 3) put the budget into action and refine as needed. When sticking to your spending plan becomes tough, remember why you're doing this! Visualize your financial goals and build in a reward for hitting your numbers. Yes, it's possible that implementing your budget will tough at first - any worthwhile goal usually is. But once you've established the habit, you'll wonder how you ever lived without a budget!
Pulling together a budget is pretty straightforward, but it does take a little time upfront to create and additional time on an ongoing basis to refine. But it's well worth the effort! Before you can find a route to your destination, you've got to know where you're starting from, right? A budget can help you figure out where you stand financially now and play an important role in helping your reach your financial goals.
One thing I highly recommend before creating a budget is to take the time to really understand your "why". It can be tough to stick with a spending plan, so it's important you have a strong "why" for creating it to begin with. Is it to take a trip at the end of the year? Pay for college? Build up your retirement? Take the time to understand what goals you want to achieve with the budget before you attempt to create one. The stronger your "why" the more likely you'll stick to your budget even when it's tough.
Start By Listing Your Expenses
The first step in creating a budget is to make a list of everything you spend money on throughout the year, whether it's electricity, gas, car payments, clothing, eating out, entertainment, etc. Make sure to include any overdraft fees or late charges you've paid as well. Take the time to really think through where your money goes. Check registers, bank statements, and credit card statements can be helpful for this. If you use software like Quicken to manage your bank accounts, this could be as simple as running a report.
When my wife and I did this for the first time, we were blown away at how much we were spending in certain areas. Folks, this is a huge reason why this process is so important and valuable! Taking a hard look at what you're spending your money on is the first step towards getting your spending under control - which is the whole point of budgeting in the first place, right? One of the biggest reasons we often overspend is simply because we don't know how much we're really spending on certain things.
Once you've figured out the total amount you're spending money on for various expenses during the year, break everything down into a monthly expense. Some expenses are already paid on a monthly basis, such as rent, house payment, electricity, etc. Figure out the average amount you pay for these on a monthly basis and include that in your budget.
Other expenses are only paid once or twice per year, such as car registration fees, life insurance premiums, homeowners insurance, etc. Divide what you pay per year by 12 to arrive at a monthly amount you can include in your budget. By doing this, your budget automatically "plans" for these expenses so that you have the cash on hand to pay them when they come due. For example, my wife and I have to pay yearly fees to register our cars, so even though they're only paid once per year, we break them down into a monthly expense and include them in our budget so we automatically have the cash set aside when the fees come due.
Cut Out the Fat
Once you've listed out your expenses and have them broken down into a monthly average amount, it's time to figure out where you're overspending. Go through each expense listed and note which ones are mandatory and which ones are at least somewhat discretionary. Mandatory expenses are things like the light bill, gas, house payments, car payments, insurance, etc. You don't have as much control over those spending items (though it would be worth figuring out if there's a way you could reduce them). The discretionary stuff, like eating out, groceries, entertainment, etc., you do have at least some control over. These are the ones you want to target to see if you can reduce your spending. There may even be a few items you'll want to stop spending on altogether.
Go through your entire list and set a reasonable budget number for each, making sure that your total spending is less than or equal to your monthly income. Don't worry about getting it perfect the first time! Budgeting is a process, and it will probably take you a few months to fine tune your numbers.
Implementing Your Budget
Once you've pulled together your initial spending plan, it's time to put it into action. This often is the most difficult part, so it may not be a bad idea to build in a reward for hitting or coming in below budget at the end of the month. If you like to eat out or buy new clothes, consider adding that into your budget as a reward if you hit your spending targets.
If your numbers end up being way off the first few months, don't give yourself a hard time about it. Simply refine and repeat until you have a budget that works for your situation. Make sure you monitor your spending throughout the month so you can make any necessary adjustments to meet your monthly budget number.
Conclusion
As I've discussed, a budget can be created in three simple steps: 1) list your expenses, 2) cut out excess spending, and 3) put the budget into action and refine as needed. When sticking to your spending plan becomes tough, remember why you're doing this! Visualize your financial goals and build in a reward for hitting your numbers. Yes, it's possible that implementing your budget will tough at first - any worthwhile goal usually is. But once you've established the habit, you'll wonder how you ever lived without a budget!
About the Author:
Be sure to visit MortgagesByMark.com for some free online budget tools , then check out some simple tips to pay off your mortgage years ahead of time and save thousands in interest.
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