When you hear the word budget, you might find yourself making a sour face, just like when you hear the word diet. Both of these terms tend to carry a connotation of deprivation. However, your attitude going in could make a big difference in the relative pain or enjoyment you gain from your experience.
Creating a healthy diet for life could include continuing to eat many of the “bad” foods you crave, so long as you focus on portion size and adding more veggies and healthy options to every meal (naturally reducing hunger and cravings for less healthy items). An attitude of adding instead of subtracting could change your whole outlook.
The same is true of budgeting. When you approach it as a process that requires you to stop spending money on fun stuff like dining out and entertainment, of course you’re going to shy away. But when you think of creating a personal budget as a way to get the most from your money, including paying your bills, getting out from under crushing debt, and setting money aside for the future, in addition to having some fun along the way, it makes the experience far more palatable.
Of course, your budget won’t magically appear just because you’ve found a way to feel good about it. You need specifics so you can get your budget underway. Here are a few steps you need to take in order to create a personal budget that delivers the greatest benefits for you, not to mention a financial plan you have a shot at sticking with.
Chart Income and Expenses
This is the basic foundation of any budget. What are you making and what are you spending? If you don’t have a good awareness of how money flows through your accounts, you can’t hope to create a manageable budget, much less stick to it.
Getting started is easy. You probably have a good idea of what you earn each month. If not, look at your most recent bank statement and fill in the blanks. Tracking spending could be a bit more difficult. You’ll want to start by writing down known expenses that don’t fluctuate much from month to month. This could include costs like rent, utility bills, and insurance, as well as loan payments (student, car, mortgage, etc.).
Now you have to try to figure out fluctuating expenses like how much you spend on food, gas, and entertainment. Try reviewing grocery bills and fuel costs over the last year to get a monthly average. Do the same for dining out, entertainment, and so on. If you tend to spend cash on these expenses, try saving receipts for cash purchases for a month to add them up, or simply total up all the cash withdrawals you made from your accounts (since you definitely spent that money).
Don’t forget to add in the interest payments on credit cards if you tend to carry a lot of debt. Being aware of the money that’s going down the toilet each month for credit card interest could be a major motivating factor when trying to pay down debt.
Now that you have a good idea of what you’re earning and spending, it’s time to find ways to reduce the latter number to ensure that you have more money coming in than going out. Instead of thinking about what you’re cutting out, think about what you’ll gain, including more quality family time when you eat at home and more cash when you no longer have outrageous interest payments.
Set Goals for Reducing and Eliminating Debt
Setting realistic goals is perhaps one of the most difficult parts of budgeting, as with dieting. Plenty of people go for fad diets that help them lose weight fast, but they’re not sustainable, and as soon as people return to their regular diet, they go overboard and regain the weight and more.
If you want to pay down debt, you need small changes that deliver long-term results. Set a limit on credit card spending that you can live with and stick to it, or resign yourself to using plastic only for specific purchases like groceries and gas. You can also consider transferring your balance to a card that offers a 0% introductory APR (on transfers specifically) to kick-start your journey to paying down debt. Then cancel and cut up your other cards.
Set Goals for Savings, Investment, and Retirement Funds
If you’re already contributing to a 401K through your work, it’s a good start. You just need to make sure your contributions are at the max for what your employer will match so you’re gaining the greatest benefits. As you pay down debt and have some extra money, don’t automatically start thinking about what you can buy. Consider how you can invest this money for your future by setting up investment accounts and retirement funds with at least a portion of the money.
Factor in Some Fun Money
All work and no play is a dull proposition that most of us can’t stomach, so make sure to set aside a reasonable amount of fun money. Taking out cash is best, because when you run out, you’ve hit your limit and there’s no more until next month.
Stop Trying to Keep Up with the Joneses
If you’re not yet familiar with Marie Kondo and her penchant for organization, now is a great time to learn about her minimalist mentality. She can not only help you to tidy your home by tossing items that no longer make you happy, but her tactics urge you to pay closer attention to what you’re spending on purchases and why, which could definitely help you forego items you’re buying for the sake of “keeping up”.
Seek Professional Help
If you’ve never budgeted before, it’s easy to get overwhelmed and fall off the wagon. Don’t despair – you’re not alone. You can work with professionals that specialize in financial advising, retirement strategies, and wealth management to create a workable budget that suits your needs, preferences, and goals. This will give you the best opportunity to craft a financial plan you can actually stick with.
Contact the qualified professionals at Investment Watch today at 410-449-1140 or online to schedule a free consultation with a trusted financial advisor.
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