“To accomplish any goal in life, it’s all about discipline,” counsels Brian Saranovitz, president of Your Retirement Advisor. “Your financial life is no different.” This financial advisor ought to know; his strong self-discipline led him to a professional football career before he began counseling clients on money.
In the process of building financial discipline in your life, budgeting is the very first step. In every other aspect of personal finance—from shopping to saving to investing to buying a home to retirement planning—your success will depend on your ability to create a budget… and stick to it! Nevertheless, according to a 2016 U.S. Bank survey, only 41 percent of Americans follow a budget.
“There is a magic about money,” says Tiffany Aliche, author of The One Week Budget. “When money is not planned for, tracked, and kept record of, it literally disappears.” Here’s a simple, step-by-step approach to how to make a budget.
Set your goal
Do you want to save for a down payment on a home? Or a beach vacation? Or simply start saving each month for emergencies? Whatever your goal is, it’s wise first to visualize the results of your budget and write it down. By imagining the results and creating a mental picture, you’re much more likely to stick to your budget and achieve your desired outcome.
Total your monthly income
Start by identifying your current, monthly, post-tax income—which is easier than it sounds: Simply add up all of your sources of income. Besides your salary, don’t forget commissions and bonuses, interest, alimony, child support, dividends, freelance income, or any other cash you have flowing in. Write it all down, whether by hand or on a smartphone or computer. If you’re comfortable with a spreadsheet, then go ahead and use one to record your data.
Determine your monthly expenses
On the same page, write down all of your monthly expenses. Make sure to include discretionary expenses (e.g., entertainment, travel, hobbies) as well as fixed expenses (e.g., housing, food, utilities, transportation, debt payments). When in doubt, it’s best to overestimate expenses.
Says Saranovitz, a former member of the New England Patriots, “It’s amazing how much your expenses add up. By simply taking the time to analyze and categorize your spending, you’ll have a much better sense of ALL your spending. Many people are surprised to find out how much more they’re spending than they thought.” Don’t overlook the little things that eat away at your money like fees and monthly subscriptions.
For utilities and other bills that vary, Aliche suggests, “To figure out an average amount of usage, take the last six to twelve months of each bill, add them up, and divide by how many months you have. Many companies will keep your old bills online, so they’re easy to find.”
Are you living within your means?
Next, you’ll want to compare the totals. Are you living beyond your means? Are you spending more than you earn? Simply subtract your monthly expenses from your post-tax income. If the result is a negative number, jump to the next slide.
If the result is positive—congratulations! You are living within your means.
The first thing you should do with your excess is to set up an emergency fund, which experts say should be three to six months of salary. A quick way to accumulate emergency funds is to earmark a percentage of your paycheck each pay period. When you reach your goal, don’t stop adding money; the more you have saved, the better off you’ll be. You could also use the extra to:
Pay down debt.
Add to your retirement fund. Make sure to get your employer’s match, if available.
Invest it. There are a number of online tools to help you choose some low-cost investment vehicles or work with a financial advisor to maximize your allocation strategy.
Donate to your favorite charity. The world is full of people who find motivation in doing good for those less fortunate. In fact, these ten lives were changed forever thanks to the power of generosity.
Spend it—that big-screen TV isn’t going to buy itself—but only when you’re satisfied with all of the above options. And make sure you shop around for the best deal.
You’re not living within your means, and you need to make changes. “Look at your discretionary expenses to identify where you can cut back your spending,” advises Massachusetts-based Saranovitz, who advises clients across the country. “While you must eat and keep the lights on and the rent paid, you can try and cut down on your non-discretionary expenses. And there’s always room to cut the discretionary expenses as well.”
Can you get a side hustle? Cut your cable subscription? Sell some of the stuff sitting in your basement? Move into a relative’s basement? Take a higher deductible on your health insurance (if you’re healthy, but you will be because you’ll be sticking to a budget and less stressed)?
Getting a credit card or another credit card is not a solution to expenses that are greater than your income. The fees and interest on credit cards can be a savings killer. However, a balance transfer card could help cut expenses while you’re digging yourself out of a hole.
Commit to yourself—and stick to it
In a recent Bank of America survey, 54 percent of millennials reported having a budget and 73 percent of those stick to their budget most or all of the time. Read your vision/goal at least once a week to keep yourself motivated.
Budgeting is hard because we’re subjected to the world of media and advertising with shiny things and happy people using those things. “One way I’ve reduced my spending on clothing, for example, I just don’t go to the mall or retail stores as much,” reveals Your Retirement Advisor co-founder and retirement educator Lynn Toomey. “To reduce the grocery bill, I place my order online and therefore reduce the number of impromptu (and unnecessary) items in my shopping cart. Plus, I use the time I saved navigating the grocery store for more enjoyable endeavors.”
A budget can also be a fun way to test yourself. Make it a competition with yourself. While a budget might sound stressful, it’s a great way to reduce your stress because, done properly, you’ll be living within your means. Imagine how good you’ll feel depositing the extra money into a savings account!
Having trouble? Get help!
Plenty of online tools and smartphone apps can help you stick to a budget, including Mint and YNAB (You Need A Budget). MoneyTips.com offers free budgeting advice, while Tiffany Aliche, also known as The Budgetnista, offers templates for tracking your budget.
If you prefer the human touch, enlist the aid of an accountability partner. He or she could be your spouse, a friend, or a financial advisor who helps you stick to your budget. Many people think they can’t afford an advisor, but the value of having one is undeniable. Says Saranovitz, “Talk to a few financial advisors to see who makes you feel comfortable at a price you can afford. Most will hold an introductory meeting at no charge.” Check out secrets your financial advisor won’t tell you.
Review prior results
How often you check your progress, your spending, and your savings is an individual decision. While we believe life is to be lived, we also believe that it can be lived a bit more responsibly with an eye on the future, when you’re no longer able to work in retirement. Says Toomey, “I’ve seen people who check their family’s accounts every day, which I believe borders on obsession. I feel it’s healthier to check your spending once a week, and then check on your progress against your goals once a month.” Review your cash reserve either annually or when your financial situation changes. Don’t stop budgeting once you reach retirement. Watch out for these 12 common budgeting mistakes to avoid in early retirement.
Anticipate changes
The one guarantee in life is that nothing stays the same. It’s important in your plan to outline the potential life changes that you’ll want to budget for. Consider events such as:
- Having a baby
- Kids starting college
- New auto loan or mortgage
- Getting a raise
- Taking on a roommate
- Helping elderly parents
- Helping adult children
Re-set goals
With life’s changes, sometimes your goals have to change as well. With a baby on the way, plans for a vacation may have to give way to renting a bigger apartment. If you have a spouse, make sure that you have this conversation together and determine your joint priorities. Get on the same page with significant decisions such as college financing, helping out a parent in need, or taking on additional debt.
Adjust the budget
If reality throws you more than you think you can handle, just take a deep breath, relax and reset. It’s more about consistency than the ups and downs. Consistent budgeters and savers do much better over the long term than those who are in and out of the commitment. It’s the same with exercising and eating right: Consistency is king. Don’t miss 25 genius ways to get a healthy lifestyle on a budget.
If all else fails, try the “Pay Yourself First” budget
Write down your post-tax income and your realistic savings goals. Then, when you collect your income, take the savings you’ve chosen and bank or invest it. Simply spend what’s left over. Adjusting your life to fit your savings goal is another way to make the budgeting process work.
Says Aliche, “If you’re not ready for a full set of discipline, try the ‘Pay Yourself First’ budget. I remember when I had no money, just setting aside $5 in a savings account every pay period helped. I wanted to get out of the thought of ‘I don’t have.’ I had to acknowledge it is about habits, not necessarily amounts. You have to start somewhere. Then I set aside more as I made more.” Begin with these habits of people who are great at saving money.
Love yourself!
It’s OK to treat yourself every once in a while… as long as you have a plan to make up the shortfall (and go through with it!). Who doesn’t like being naughty every once in a while? Says Saranovitz, “It all comes down to determining the priorities in your life and what will make you happy. We suggest that going without a few shiny things and being a better penny pincher, or budgeter, or saver, will go a long way toward happiness, too. Don’t give in to the ‘BUY ME, SPEND MORE, TAKE MORE CREDIT’ messaging that plagues our society.”
“I named my future self ‘Wanda,’ who is me at 80,” says Aliche. “I think about her a lot. You wouldn’t put your grandma to work. Think about having to put yourself to work when you’re 80. You should do what you can now to make sure your 80-year-old self doesn’t have to work!”
Don’t let money sour your relationship
If you’re in a relationship, open and honest communication around money is the best policy. For couples, a recent survey shows finances were a greater source of relationship tension than sex, according to 68 percent of respondents. On the flip side, a 2015 MONEY magazine poll found that across the generations, couples that have greater financial trust in each other and fewer money conflicts reported having better sex lives. Who knew budgets could be so sexy?
If you’re in a relationship, both you and your significant other should each have some money to spend any way you want, no matter how small and without guilt. Make sure to budget for this “play pay,” and enjoy it!
Don’t miss these other tips you might need for creating a budget and sticking to it.
