How to Create a Budget You Can Follow
September 18, 2020
A budget is one of the most important financial tools you need. Whether you are just starting out, getting ready to purchase a home, getting ready for retirement, or anywhere in between, having a budget is your key to financial success. However, most people loathe the idea of budgeting. Everyone knows a budget is a good thing, but most people don’t know how to do it in a sustainable way, and therefore, end up failing. Creating a budget you can follow is possible and not nearly as hard as you think it will be.
Why You Need a Budget
Only one in three people actually create a thorough budget. This means that two out of three people don’t really know where their money is going. Even if your income is high and all your bills get paid, you need to understand where your money is going. Things can change quickly, and without a budget, you don’t have a secure financial situation. A budget lets you know exactly what your financial status is and helps you understand exactly how much you bring in and how you spend it.
Mistakes to Avoid When Making Your Budget
There are plenty of mistakes to make when creating a budget. If you don’t put in the time and effort to think through your budget, it’s most likely not going to work for you. Some common budget creating mistakes are:
Failing to Consider Your Personality
Think about your lifestyle. If you are used to spending money on what you want when you want it, cutting out all discretionary spending isn’t realistic. If you enjoy going out, give yourself a monthly allowance to do so. The point of the budget isn’t to curb all spending, but to show you where your money is going and what you can realistically afford to do within your means.
Making Your Budget Too Strict
You need to build some flexibility into your budget, or it will be doomed to fail. Some months your expenses may be higher, and you’ll need a bit of a cushion. Other months you may have a surplus, which you can bank for other months. If you strictly allot for every single dollar with no flexibility, you may find yourself struggling.
Your Expenses Are Higher Than Your Income
If you realize that your expenses are higher than your income, no budget will work. You can cut your expenses or increase your income, but until you do that, you won’t be able to stick to a budget.
How to Create a Personal Budget
Creating a personal budget will take some time and effort.
1. Understand your financial picture. Look at your income, all your bank accounts, credit cards, and monthly bills. Make sure to look at expenses that are annual and semi-annual too.
2. Spend one month tracking all your spending. Every cup of coffee, tank of gas, or dinner out should be written down. Most people try to simply estimate when it comes to making a budget, and they really don’t understand how much they are actually spending.
3. Assign each expense a category to see how much you spend total throughout the month.
4. Allocate income toward your needs first. These are the essentials. Food, shelter, utilities, transportation, and debt payments.
5. Determine what you can set aside for savings every month and pay yourself before you do anything else. It doesn’t have to be a huge amount-it just needs to be an amount you can afford to save every month. Make these savings automatic if you can so that the money never enters your spending accounts.
6. The remaining income can be used for things you want. Now you know how much you can allocate to each of these categories. Be realistic. This is where looking at your spending patterns can help you. If you are accustomed to your daily coffee or Friday night happy hours, you can plan for that now. It’s important to allow yourself some fun money. Knowing that you can occasionally treat yourself will make you more likely to stick to the budget.
7. Monitor how you stick to the budget. Most likely you made some mistakes, and you can adapt your budget. Forcing yourself to stick with something that didn’t work will almost guarantee that your budget will ultimately fail.
8. Hold yourself accountable. Having a budget will help you spend intentionally. There is a lot of power in just knowing exactly what your financial status is. When you know where your money is going, it’s easier to think before you spend.
Just because a budget may be uncomfortable to start thinking about doesn’t mean it should be avoided. Like changing any habit, you will experience some growing pains as you adjust, but overall, you will soon be happy with your improved financial health. We can help set you on a path to financial success.
Contact Safe Money Partners to start the conversation. We can help guide you with trusted, proven savings and budgeting strategies that will help you reach your short and long-term financial goals. You don’t have to be a millionaire to be rich, you just have to be smarter with how you spend and save your money.
By Jeff Mohlman