A budget does not discriminate. It is for everyone to use (and everyone should use it), but more often than not, people start budgeting when it’s already too late. That’s because financial budgets are seen as bad guys. They keep you from spending too much on your favorite things and seem rigid and hard to follow.
But the opposite is actually true. A good budget helps you to make short and long term financial goals, and it is actually a remarkably flexible tool.
Give the budget some love; here are a few basic tips to get you started.
Track Your Spending
You can’t create a budget if you don’t understand where your money goes each month. Take three months to track every debit and every credit to your accounts. Write down the following details on every expense:
- Expense or item purchased
- Total cost
- Method of payment
- Date purchased or paid
You’ll use average category expenses over the three months to build your budget.
Separate Fixed and Variable Costs
Fixed vs. variable costs: one of the first lectures taught in just about any finance degree program. And rightly so, because it’s important to know the difference between the two.
Fixed costs are non-negotiable (e.g. your mortgage payment). Variable costs fluctuate (e.g. entertainment expenses).
Take all of your expense recordings over the three months and separate each purchase or payment into either a fixed or a variable category. This might be the most important step in creating a working budget. All of your earnings each month will go toward paying off the fixed payments first and foremost.
Get Your Priorities Straight
You have to pay your fixed expenses off each month (they’re non-negotiable remember), but how do you allocate your earnings after that? Here are general goals you’re working with in a budget:
- Covering bills
- Decreasing debt
- Increasing savings
- Maintaining emergency funds
- Finding disposable income (or money for “fun” things)
You’ll have to decide which goals are most important to you. They’re different for every person, family, age group, etc., so figuring out what works best for you and being willing to change it periodically is key.
Don’t Forget the Emergency Fund
It’s easy to forget because it might not be needed on a monthly basis, but an emergency fund is always crucial to have. Maybe there’s a set amount you’d like to maintain in a savings account each month. Or maybe you’d just like to make small fixed payments into the emergency fund each month no matter the total. Either way, make sure that you have room for a broken refrigerator, an unexpected hospital bill or even a layoff.
Review Your Budget Quarterly
Finally, it’s important to reevaluate your financial needs often. Remember, budgets are flexible, and they can change several times a year. A quarterly review strategy is a good starting point. It helps you to set up new categories for seasonal expenses (like Christmas shopping or summer vacations) and gives you enough data to work with at each review. If something isn’t working, change it. After all, your budget should be working for you—not the other way around.
Are you a master budgeter or think you have what it takes to become one? Consider checking out schools in your area and applying to a finance degree program.
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