3 steps to a better budget
Starting a budget takes discipline and commitment. But the benefits of managing money are worth the time and effort. In the end, you’ll free up more time and feel less stress. And as you achieve your goals, a sense of satisfaction will keep you going. All of this will give you greater control of your financial future.
If your finances didn’t turn out the way you’d like last year, then follow these three steps to tracking your spending and saving.
Step one: Discover where you are right now.
Start with this simple spending diary, tracking your expenses for at least a month or two. As you record your expenses, look for patterns, keeping an eye out for purchases that aren’t necessary or that you could have saved up for instead of charging to a credit card.
As you review your spending, ask yourself:
- Do I spend more money than I make?
- Do I place money in a savings account regularly?
- Do I charge items instead of saving for them?
- Do I think about an emergency fund, but fail to have one?
- Do I spend uncontrollably?
Step two: Set financial goals.
Everyone sets goals for the new year. You’re much more likely to achieve goals that are specific, measurable, adjustable, realistic, and time-oriented. These are often referred to as SMART goals.
To get started, choose several financial goals. Consider creating goals for the short term (one year), mid-term (one to four years), and long term (five or more years). Once you’ve identified your goals, break them down into manageable chunks, such as monthly amounts to save. Here are some examples of SMART savings goals and how you could break them into chunks for your budget.
Short term: Establish a $600 emergency fund by the end of the year. Save $50 per month.
Mid-term: Buy a used car valued at $12,000 with cash in four years. Save $250/month.
Long-term: Save to make a 10% down payment in five years on a home priced around $150,000. Save $250/month ($3,000 / year)
Step three: Create and manage a spending plan.
A spending plan is your blueprint for day-to-day personal finances. It’s as simple as focusing on two key components: income and expenses.
Start with your income. List all of your income sources, including paychecks, tax refunds, bonuses, gifts, dividends, interest, pension, and Social Security. Add these all up, as you’ll need the total for later.
Move on to your expenses. Use your spending diary to determine how you’ve been spending your money. Categorize expenses as one of these three: fixed (such as a mortgage or car payment), flexible (these costs tend to vary month to month, such as food, clothing, and utilities), and periodic (insurance and taxes). This will help you get a better grasp of your monthly cash flow.
Now determine what you need to spend each month versus the expenses you might be able to reduce or cut entirely. It’s as easy as identifying them as necessary (think basic needs: food, shelter, medical), discretionary (vacations, entertainment), personal (small purchases, such as coffee or snacks, that add up over time) and miscellaneous (unplanned expenses). Review your expenses in the discretionary and personal categories—are there any you can cut back on?
Remember your total income? Compare that with your total expenses. If your income is more than your expenses, that’s good! Consider making adjustments that can help you save more or pay off any debt sooner. However, if your income is less than your expenses, it’s time to make some changes. That means going back to your spending diary and expense categories to see if there are any additional changes that can be made. Perhaps cut one coffee a week, make fewer trips to the mall, or dine out less—modifying your spending behavior can take time, but it makes a huge impact on your budget.
Tip: Looking to cut more expenses? Look for these common spending leaks
- Parking tickets
- Unread subscriptions or unused memberships
- Ignored repairs
- Leftover food
- Quick car acceleration
- Unused services (cable, phone, Internet, etc.)
- Late fees
- Lights left on; water running when not in use; leaky faucets
- Impulse shopping
- Dining out frequently
After you’ve created a spending plan, track your expenses, pay your bills on time, balance your accounts monthly, and regularly review your goals. If your budget no longer fits your goals, make adjustments.
Keep your goals in mind, and celebrate successes along the way. And going into next year, you’ll know what financial freedom feels like.
Want help in person? Consider attending one of STCU’s “Budgeting 101” workshops, free and open to the public.