Why do you need a budget? If you don’t know where your money is going, pretty good chance you’re not saving as much as you should. I’ve worked with some clients that thought they were bringing in more money than they actually were (a.k.a spending more than they were earning). Or they didn’t realize how much money they were spending on a particular expense (a.k.a the moment of truth).
The most powerful contributor to building wealth is saving money. A budget is a valuable tool that can help you make smarter decisions.
It can provide a framework to achieve your goals, for example, saving more to meet lifestyle goals like month long travel, pay down debt, reducing expenses or getting ready to Journey Through RetirementⓇ. Think about the budget simply as a plan for what you’re going to do with your money. Understanding and knowing where and how your money is spent is a hallmark cornerstone of successful investors: Here are a few guidelines to help you get started.
01. Track Your Income And Expenses
In order to begin building a realistic budget, you’ll need to track what’s coming in and what’s going out for at least a month or two. Start by writing out any sums of money that you receive and spend. If you have multiple sources of income, make sure to take all of them into account. For expenses, it may help to list them in order of magnitude. You can even create various categories if it helps you stay organized.
The largest expense is probably your mortgage or rent. Then you have utilities (water, heat, electricity), auto expenses (car payment, insurance, gas, maintenance), food, medical/dental expenses (insurance, prescriptions), and so on. The important thing here is not to forget the little expenses. For example, if you go out for lunch, buy a magazine to read on the train, or go out for coffee with your coworkers, these expenses, however insignificant they may seem, need to be included in your budget. They say a small leak can sink a great ship; similarly, a few dollars here and there can add up faster than you think.
02. Start Planning Ahead
Once you have tracked your income and expenses for a while, you should have a pretty good idea of where your money comes from and where it goes on a monthly basis. However, some expenses do not happen regularly, and you still need to be prepared. If you anticipate these expenses and include them in your budget, you can plan without breaking the bank.
Some examples of such expenses are holiday gifts, emergency car repairs and vacations. Now you are ready to create your budget. Based on the income and expenses you tracked, write down what you expect your income and expenses to be next month, or for the next few months. Try to be realistic; your budget should reflect your actual situation, not your ideal one.
03. Stick To Your Budget
Creating your budget will be easy compared with sticking to it. It’s not a disaster if you spend a few extra dollars here and there, but in next month’s budget you should account for them. The budget is a plan a framework to work within. Also, if you notice unusually large expenses where there shouldn’t be any, now is the time to adjust them. Keep in mind that your budget should change as your financial situation changes, so monitor it regularly and make changes when necessary.
Eventually, a budget is supposed to teach financial discipline and the difference between necessity and luxury. You may be surprised to find out how much money flies out of your pocket for things you don’t need and will not use. It may seem that sticking to your budget means making many sacrifices, but ultimately it’s your financial future that you’re building.