Financial advisors say the key to successful money management is a budget. It’s easy enough to make a budget, but how do you create one that you’ll actually stick to?
First, let’s look at some of the reasons money gurus give for having a budget in place:
- Controlling your spending starts with understanding how much disposable income you really have
- It’s less expensive and less stressful to save for large purchases than to pay interest on them because you charged the expense to a credit card
- If you live without a budget, you could come up short when it’s time to pay rent and other crucial bills
- Reaching financial goals takes time, and it may be impossible to stay on track if you don’t have a budget
The problem with budgeting is that it’s unpleasant. Many people think of budgets like straight jackets for your money. It takes all the fun out of being an income-earning adult. The truth is, if you want to do the really fun stuff, a budget can help you get there.
Here are some financial goals that inspire the common budget:
- A big trip overseas
- Major home improvements
- The car of your dreams
- College funds for your kids
- A designer wardrobe
- A beautiful wedding and honeymoon
The goal of a budget is simple: to ensure you spend less than you make and to help you spend in a controlled, intentional and healthy way.
Track Your Expenditures for a Week
This is the worst advice ever. No one who struggles with sticking to their budget does this. So, don’t feel bad if you’ve tried and failed. If you can do this, you don’t need to worry about sticking to your budget, because you are naturally an organized and disciplined person.
Unless you spend cash, it’s simple to look back through your credit card and bank accounts to see where you spend your money when you aren’t thinking about a budget. Take this information and use it to make your budget. If your spending is out of control in a certain category, you’ll have to decide whether you want to change that behavior in favor of a bigger financial goal.
If you use your past spending information as opposed to tracking your spending for the next week or more, you also have the advantage of creating your budget while you feel inspired. This isn’t the most exciting endeavor, but it’s worth it. Give yourself every advantage by putting together your financial plan while you feel positive about the potential outcome.
Create your “four walls” plan
Dave Ramsey came up with the term “four walls” and it’s a simple idea that is easy to implement. Think about the things you need to pay for so you can live and work.
• Rent or mortgage
• Property taxes
• Utilities (this doesn’t include entertainment like television or Internet unless you need those things for your job)
• Car payment
• Gasoline or fuel to get to work
Add up those costs and subtract them from the income that comes into your household each month. Again, you should be able to find out the exact amount of money coming in by looking back at your bank statements.
Decide how you’ll spend your discretionary income
Discretionary income is the money you have after your crucial bills are paid every month. So, this is the area where you’ll have to decide what’s important to you. Hopefully, you’ve decided to save 10% of your total income and you’ve taken it out of this category first.
What else matters to you? Here are a few things to consider in this category:
- Eating in restaurants
- Entertaining friends at home
- Going to the movies
- Vacations and long weekends away
- Your morning coffee
The list is personal, of course. This part of the budget simply tells your money what it can do for you. Be flexible, here. The more restrictive your budget, the less likely you are to stick to it.
It’s OK to have some fun with this. Enjoy the sense of accomplishment as you watch your savings grow and your debt diminish. Budgeting is an important way that you can take control over your life.