Budgeting can seem tough. You can make it less intimidating by thinking of it as creating a spending plan — a well-thought-out and flexible document that details how you’re going to spend your money in the weeks, months, and eventually, years to come. Having a spending plan can help you support your current lifestyle while setting you up for future needs. Here’s how to get started:
Review what you spend
Tiffany Aliche, founder of financial education website The Budgetnista Blog and author of The One Week Budget, recommends you start by taking stock of your financial situation. She notes, “It’s OK to have goals, but before we even identify those, [ask], ‘Where are you?’”
To get a sense of where your money is coming from and where it’s going, look over your bank and credit card statements from the past two months. If you don’t have these statements, begin tracking your expenses for the next month. Do you regularly spend more than you earn? If so, finding ways to cut back should be your first order of business.
Check out the Hands on Banking® Budget Toolkit for a detailed outline of what to consider when reviewing your earnings and spending.
Organize your expenses into a spending plan
Once you’ve reviewed your spending habits, organize your spending by organizing the payments you make into a spending plan. You can write these out on paper or use online tools such as the Budget Watch.
An effective way to categorize your expenses is by what is fixed, flexible, and discretionary.
• Fixed expenses are those you pay regularly and cost the same each time, such as loan payments, insurance, and rent or mortgage.
• Flexible expenses are paid regularly, but the amount can change, such as groceries or utility bills.
• Discretionary expenses are things you choose to spend on, like going out to eat or shopping for clothes. Categorizing your spending this way can help you get a better picture of where your money goes and determine where you may want to cut back.
You should also write or enter in the timing of these payments — whether you make them weekly, monthly, or yearly. By paying attention to timing, you can better prioritize what needs to be paid first and possibly spread out payments throughout the month. This way, you are not overwhelmed with due dates in one specific week.
Another advantage to knowing this schedule? When you have a fixed payment due, such as insurance or car payment, you can set money aside each paycheck for that expense.
Make your spending plan achievable
It’s important to make sure your spending plan is achievable on a day-to-day basis. To help with that, you can do one or all of the following as you’re able to:
● Track cell phone usage in the same way you track your spending habits. Consider what features you use most, and try to eliminate paying for extras you don’t need.
● Weigh your transportation options. Frequent ride-sharing can drain your income, so consider carpooling or taking mass transit if the rates are less expensive.
● Adjust your plan for the unexpected. Keep tabs on your emergency fund so you can leverage it when urgent expenses, like a medical bill, pop up.
Though your spending plan will be a work in progress, paying bills on time should always be your top priority. Late fees and interest can add up quickly and may hurt any short-term benefits you gained by prioritizing other financial goals. To avoid these pitfalls, try setting up:
● Notifications on when a bill or payment will be due ahead of time so you can make sure you have enough to cover it.
● Automatic payments so that you don’t forget to pay any bills.
● Automatic transfers from your checking account to your savings account so you can ensure you’re putting away as much of your paycheck each month as you intended.
Add your financial goals to your spending plan
Your spending plan details can also tell you how much money you have to put toward your financial goals via savings, investing and other types of accounts. Some goals to consider could be:
● Paying off debt
● Buying a car
● Moving to a new home
● Building an emergency fund
Because your spending plan helps you see where your money is going, you can incorporate your goals into it and use it to decide how to change your spending habits to meet them. Set target dates for reaching goals, and calculate how much you will need to contribute on a weekly or monthly basis. This may mean temporarily paring down some discretionary spending, but make sure to be realistic and give yourself enough time to reach those goals.
Regardless of your expenses and goals, your spending plan should account for all of your activities involving money — and help you to take charge. By managing your spending habits, you can feel empowered to get where you want to be when it comes to your finances.
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