Would you believe that for a large percentage of Americans the word “budget” isn’t a part of their active vocabulary?
Indeed, the idea of a budget for many people is “Well, if it’s the end of the month and I still have money left in my account, I’m O.K., right?”
A budget is the nucleus of a successful financial plan. It also can be a big eye-opener for someone who has never tried to do one before. So, how do you get started?
First, there’s no one right way to do it. A Google search for the words “personal budget” returns more than 134 million pages.
We’ve seen successful budgets done on a half sheet of paper and also seen successful budgets done on a spreadsheet with year-over-year projections. The moral here? Do what works for you!
Start by finding a way to track spending — all of your spending — for 30 days. Keep a small notebook with you or use an online note-taking app.
Log every expense that you have, and I do mean every expense. Seventy-five cents into the soda machine at work? Log it. Make your rent or mortgage payment? Log that, too.
Big to small, from housing to candy bars, make a record of everything. Importantly, don’t try to change your lifestyle in the 30-day period. A realistic glimpse of your financial habits is what you are looking for here.
Second, at the end of the 30 days categorize your expenses. Use broad-based categories like housing, utilities, food, clothing, transportation and the like.
If you’re so inclined, break down each broad category on a more detailed basis. What trends do you see? Where are you spending most of your money?
Third, let’s look at your income. How much income do you have and from what sources? What are the effects of taxes? List out all sources of income that are reliable and regular.
Sporadic work or expected inheritances don’t count. What we’re looking for here is consistency.
With those things done, take a look at how you stand. Are you running a surplus each month, where money is left over after expenses? Alternatively, are you going into deficit spending each month, where your expenses outweigh your income?
Make sure to look at any credit card spending you have. If you find yourself with a lot of credit card debt accumulating each month, you likely are deficit spending.
Be sure, though, that you’re not doubling up and logging expenses into your categories that you already have posted as credit card debt.
Once your review is completed, look for ways that you can save. Are you spending a lot of money on fast food or lunches out? Try brown-bagging it or bringing leftovers to work.
Paying for 180 channels of satellite television at $100 per month? What about “cutting the cord” and trying an antenna and one of the streaming services? I’ve met very few people who couldn’t find a few ways in their budget to conserve money.
Finally, when your review is complete, keep the budget front and center. It’s not a static document and should be constantly referred to and revised when necessary. Use it as a tool for keeping yourself on track.
Once you successfully track spending, set some goals with your budgeting process.
For example, you may have a goal to add $100 a month to a Roth IRA. That needs to become a line item on your budget. Don’t forget to budget for fun as well, including vacations and entertainment.
Remember, the “end-of-the-month checkbook balance” approach may work for a while, but it’s not the best long-term method. Commit to living on a budget and you’ll be well on the way to sorting out the pieces of your own financial puzzle.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.