Everyone always says that the first step to saving more money is to create a budget.
But how does this really help you exactly? After-all, isn’t budgeting just a list of your expenses and income?
Yes, it is. But there’s a lot more to it than just making a list.
Budgeting is all about getting your finances organized and operating with a plan. I can’t think of a professional business in the world that doesn’t operate with some sort of financial plan. Why should your home finances be any different?
Just like someone who is on a proper diet trying to become more healthy, a good budget can help you to handle your money in a way that is within reasonable limits. By giving them the attention they need, you start to become more aware of what’s going with them and what areas need improvement.
Here’s what you can do to get started …
1. Create your own personal budget
It’s easy! All you need to do is list out all your expenses at the bottom and all your income at the top. Go through your last 6 months of bills, checks, credit cards, etc. You can get started with something as simple as Microsoft Excel. This will help you become aware of where your money is coming from and going to.
2. Make the budget for the entire year
Making a budget for just one month can be a big mistake! An annual budget will do a much better job of keeping you on track. It can capture unique and one-time expenses that you wouldn’t normally catch with an annual budget. Plus its a very easy way to see how your cash will flow all year long.
3. Estimate and record
For each month, make two columns: One for much you intend to spend and the other for how much you really spent. Start out the year with all projections. As each month passes, delete the projection for that month and fill in how much you really spent. This way you can easily “estimate” how much you’re going to spend this year and look for signs of trouble.
4. Set a Limit
Set specific category limits on what you can or should spend. For example: Maybe only limit yourself to going out for dinner once per week.
5. Look for early warning signs of trouble
Because we set our budget for a whole year with projections and all, will we fall short at any specific times throughout the year? For example, when it’s back to school time or Christmas, will your cash flow fall short?
6. Be sure to plan for the unexpected
Surprises will happen! Cars will start making strange noises. Medical bills will cost more than you think. Someone will go over on their cell phone. You get the idea. For this reason, I suggest having a line item called “Misc” where money can be set aside for these friendly little surprises.
7. End each month in the black
Only spend as much or less than what you earn (net of taxes). Although this one may be obvious for some, it may not be for all. If you spend more than you make, you’ll be heading for disaster. Make sure that every month is planned for success.
8. Put any extra money to good use
If your budget shows you’ll have a surplus of money for the year, divert that money into something sensible. This could be for anything that’s going to make a positive impact on your finances such as your savings, retirement, debt payoff, etc.
9. Build your emergency fund
The first thing I’d do with any surplus funds is to build up an emergency fund. Emergency funds are a “must have” and will help protect you from racking up crazy interest expenses when you need the money the most. Your emergency fund can be as little as $1,000. However, most experts recommend that you build up at least 3 to 6 months worth of income.
10. Budget for free
There’s no need to spend money on fancy-pants budgeting software. These days, everything is just a click or download away. Use free apps like Mint or Personal Capital that will quickly scour your financial records and organize them automatically into very detailed reports that you can use to pinpoint where your problem areas are at.
11. Talk about your budget
Communicate regularly with other family members about the status of the budget; whether good or bad. If something is a problem, the other people have to know about it in order to help you fix it. To really make this whole saving thing work successfully, everyone has got to be on board!
12. Keep a list
Make a list of bigger purchases and buy only the things “on the list”. This will help you avoid splurges that can quickly derail your good efforts. I’ve been using this trick for years and it’s helped me to skip all kinds of distraction purchases. If it’s not on the list, then its not a priority and we don’t need to get it.
13. Stick to the budget
A budget is only as good as the effort you’re willing to put into it. If you diverge and get off track, then naturally there isn’t going to be any money to do the things you planned on. Stay committed and disciplined, and your finances will thank you in the end!
Featured image courtesy of Flickr