- The goal of any budget is to give you more control over your income, allowing you to prioritize both spending and saving habits.
- When you understand how you spend money you can adjust unhealthy spending patterns, giving you more resources for higher priority needs such as debt reduction or retirement savings.
- Small changes can make a big difference in your overall spending.
The budget process often creates resistance. It might feel like a burden or appear to be too hard or overwhelming to follow. In some cases, you may not want to change your spending habits, which can become a barrier to financial success.
The reason for a budget is to give you more control over your financial resources so you can choose how much you will spend in various categories. When you understand where your money goes, you gain more control overspending. You choose your financial priorities and gain more financial freedom.
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Principles to create a budget you will actually follow:
Track Your Spending for 30 days. The first step to a successful budget is to understand your current spending habits. With this information, you can create a budget based on actual spending rather than an educated guess.
Some bills, like your house and car payment, are easy to calculate because they remain the same every month. Other expenses vary from week to week, making it is easy to underestimate the costs. Food and entertainment fall into the second category.
When you track spending, you get a clearer picture of variable costs, which can help you identify areas where you can cut back.
Separate Your Wants from Your Needs and necessities from luxuries. This may mean taking extra time to really evaluate and dig into what is important such as a coffee shop latte a day or coffee at home. Look over your monthly spending and identify which items are mandatory and which are wants. Dig in! It will start to feel good and rewarding to see the savings instead of instant gratification purchases that you used to think are ‘needs’, and now are calculated as ‘wants’. Overall, your financial priorities and future goals will impact and help you decide what you call a ‘want’ versus a ‘need’. This may not be as easy as forgoing a coffee shop latte. Take time reviewing everything. For example, one person might feel retirement contributions are a need, where another person might see it as a want.
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Once you prioritize costs, you can adjust the discretionary portion of the budget to align with your financial priorities.
Make Small Across the Board Cuts. One of the biggest mistakes in creating a budget is eliminating “unnecessary” spending. While you may not consider entertainment, eating out, and other discretionary costs as necessities.
A successful budget works with your existing spending habits and slowly implements changes that can make a big impact. Trying to make drastic changes immediately can lead to a fast retreat and abandoning the budgeting process altogether.
Instead of eliminating “fun” spending, cut back by 10%. Eat out one fewer times per week, dine at a less expensive restaurant, or find a coupon to lower the price of the meal. Each of these strategies gives you a similar experience while lowering costs. This step can establish a working budget that guides your spending.
Account for Changes in Income. The explosion of the “gig” economy translates to more variable income. Whether you drive for Uber, work part-time, volunteer for overtime, or receive commissions, when income varies, your budget needs to accommodate that reality.
One strategy is to pay infrequent or quarterly bills in the months with higher income, allowing you to stay within your budget when you don’t have the extra income. Others budget without considering variable pay and use the extra for things like vacations or holidays.
Don’t Forget Intermittent Bills. Not all bills come due every 30 days. Quarterly, semiannual, and annual bills can end up on a credit card if you don’t plan for the expense. Break intermittent bills into a monthly amount to set aside, so you have the full amount when the bill comes due.
The budgeting process will increase your awareness of where you spend your income. Use this understanding to gain more control over your finances, enabling you to reach your financial goals more efficiently.
Why do budgets fail?
Creating and living within a budget requires more than just writing down your expenses. A budget is a working document that must also include a system to track spending and the flexibility to make adjustments. Online spending apps make it easier to establish and track spending, giving you the tools needed to successfully follow a budget.
What is the hardest part of living within a budget?
The two key elements to any successful budget are accurate estimates of spending needs and a way to track your progress. Any budget that misses either piece is doomed to fail. There is no right or wrong way to follow a budget, giving you the flexibility to find a system that works for you.
How can I make a budget I can stick with?
There are a few key steps in the planning process that will make following a budget easier. First is to take the time to understand where you spend money and what costs you have. Don’t forget to account for monthly, quarterly, and annual expenses. Next design your budget in a way that it feels like a guide rather than a restriction. Lastly, execute. Every week review spending and adjust the budget when needed.