Getting control of your income is probably the single most important thing you can do to ensure financial success. A budget is a tool that allows you to manage your income and achieve your financial goals. It gives you the ability to make sure your money is going to your top priorities.
Creating a budget is not all that hard. It requires a little attention, and discipline – but you can do it. What many people don’t realize is that budgeting is an iterative process. The first time you create a budget it will not work out very well. Stick with it, you will get better and better. It will be worth it.
Here are the steps to get started:
1. Create a first draft. If you haven’t been tracking your expenses closely, there will be some guesswork involved and that’s ok. Make a list of how much you think you spend each month and on what. You may want to review bank or credit card statements. I have included a form you may use to get you started. PDF link; Excel link
2. Track every dollar you spend. There is more than one way to do this.
The old-fashioned way is to write everything down and add it up. You probably will need to monitor bank transactions and possibly credit card transactions to include everything. This approach can be a little tedious and error prone; but it makes you very aware of the money you are spending.
A more modern approach is to use an app. Mint and EveryDollar are decent choices. You can find them by searching online. They can be accessed through your computer or phone. Both allow you to update budget amounts for each category and connect to your bank and credit cards to automatically pull in all money transactions and categorize them.
3. Review your spending. It is a good habit to categorize your transactions almost daily. (It takes about 3 minutes). Especially in the first month or two, you will be modifying your budget frequently. There will be entire categories of spending you forgot, and others you did not estimate well. Many people are appalled the first time they learn where their money is really going. That’s fine – you are learning, and this is a necessary step.
4. Modify the Plan. For every category compare your actual spending to the plan. Ask yourself “Do I need to modify the plan? Do I need to modify my spending?’ Initially you will probably be modifying both quite a bit,
5. Repeat. You should update and refine your budget each month based on what you learned from the previous month, and any unique income or spending for the upcoming month. Over time, your actual spending will come closer and closer to the plan.
For most, it takes about 3 months for the budget to become accurate. The better you become at creating and adhering to a plan, the better you will become at eliminating debts or saving for future goals.
Watch for my next update that will include additional tips for succeeding with a budget.