The best way to stay on top of your finances and manage them efficiently is to set a budget. Budgets are not just for businesses. They are important tools for individuals and households as well, teaching users to assess financial priorities, to set goals, and to stay disciplined. If you’ve never set a budget before it may seem overwhelming, but it is simple to do and does not require complex software and accounting skills.
Some helpful steps to get started:
Ideally, the household budget will be monthly since most major expenses are paid on a monthly basis. Since your budget revolves around amounts of money expected to come in and go out, you must start with accurate financial records. Don’t have any? Never save bills or receipts or pay stubs? Take the first month to gather those things and save any that come in. Put them in a designated folder, and if they are autopay accounts and/or direct deposit, create an online folder that you can store emailed receipts. After a full month of paying housing, utilities, auto loans, credit cards, insurance premiums, and other typical expenses, you should have documents (paper or online) to show the amounts you paid for each. Use your monthly bank statements and credit card statements, as well, to verify the amounts paid and to fill in any record-keeping gaps.
Your budget document can be as simple or as complex as your financial needs dictate. An Excel spreadsheet is a good tool for budgets; there are also many accounting software programs that can help a more experienced budget-maker get more sophisticated. But even an old-fashioned ledger will do. The document does not have to be fancy; it only has to be accurate.
Create entries for the amount of money you have coming in every month: paychecks, side money, investment returns, etc. Using the records you’ve saved, create entries for your typical monthly expenses, as well. Start with essential bills, and leave discretionary spending for last. If you have bills that fluctuate each month, assign each one its average amount, preferably in its higher-dollar range. This will ensure that you always have enough money to cover it.
Subtract the total amount you must spend each month from the total amount you make, and this is what you have left for discretionary and non-fixed spending.
The outcome of a good household budget is money saved. Having your expenses laid out in black and white will help you see over time how much money you may be wasting on nonessential items or services. Eliminating wasteful spending will help you start saving more, and sooner.
You should also have an entry dedicated to monthly savings. Set a savings goal for each month, even if it is modest, and stick to it. Many financial experts will tell you: pay yourself first. This means make your savings a priority and stay disciplined each month to contributing the planned amount, even if it means cutting back on something else.
Making an overall spending and savings plan is a key aspect of budgeting, but what good is it if you don’t stick to it? Each time you take in or send out money, record the transaction in your budget so that at the end of the month, you can compare predicted spending with actual spending. Use your banking records as well, to make sure your financial reality matches up with your goals. (You’ll be glad you kept good records when tax time rolls around.)
Everyone knows life is unpredictable. Some of the most unpredictable moments are also the most expensive. A good budget has some flexibility so that unplanned expenses do not throw everything off. Set up a small emergency or flex spending category so that you’re not caught financially off-guard when your car breaks down or your washing machine overflows. The worst that can happen is that you never need it and it becomes more money saved at the end of the year.
Creating a budget can seem like an overwhelming task for those of us who don’t like bookkeeping and are not as financially disciplined as we want to be. But tracking your spending, keeping good records, and conducting an end-of-year audit of your finances are necessary steps toward financial freedom.