How to Create a Budget (and Stick to It)

By Tracy Scott

Budgets are the best way to determine how you need to spend today’s money to achieve tomorrow’s goals.

Here’s how to create a basic budget and stick to it so you can achieve your goals faster and enhance your financial well-being.

Start with the basics

You’ll need to create a basic budget to determine how well you’re managing your cash flow.

First, determine your take-home pay from all sources over the past 60 days. This includes income from side jobs, alimony, Social Security or child support payments, and sources of income from other household members. Use paystubs and your direct deposit history to help confirm your total income.

Second, identify your expenses. Mortgage, student loan and insurance payments are likely to be the same amount each month. Such expenses are considered “fixed” since they have a predictable due date and cost each month. Don’t forget to include “variable” expenses like gasoline, groceries, auto maintenance and entertainment. These expenses are likely to vary weekly, monthly or annually. Your credit union account history, credit card statements, and receipts should give insight into your total expenses.

Again, use the past 60 days to gain insight on where your money is going each month. Be sure to include expenses that occur biannually or annually. For example, if you have a recurring annual expense, divide the total by 12 and add this portion to your monthly budget.

As each month passes, continue to track what you actually spend by keeping receipts and continue to reevaluate your spending.

Next, subtract your expenses from your income. If you have money left over, congratulations! You are living within your means. Extra funds can be used to reach a financial goal, such as starting an emergency fund, contributing more money to your retirement account, or saving for your next vacation. Without an emergency fund, a sudden job loss or unexpected expense can unravel the most well-intentioned budget.

If there’s no money left after deducting your expenses from your income, then it might be time to increase your income, reduce your expenses, or both.

Next, reevaluate. Your first pass at creating a budget should not be your last. Save receipts each day to update your estimates of variable expenses. Continue tracking expenses to determine if you underestimated costs in the areas of groceries and gasoline, or if you’ve overestimated in entertainment. It’s also possible there was a budget category that was unaccounted for the first time around. In either case, you can do something about it. Take time to note the dates your income sources are deposited in your checking account and when each expense is due or paid.

Finally, make adjustments. Even if you could not identify every expense during your initial budget review, you might have noticed late fees eating away at your income. Some companies may charge late fees for being even one day late. Making an adjustment here is as simple as contacting the company and requesting a new payment due date that’s in line with when your paycheck hits your checking account.

Tips for decreasing spending

The simplest way to decrease spending is by reducing the frequency in a variable spending category. For example, entertainment is considered a variable expense. Let’s say that in the past 30 days you went to two hockey games and saw four new releases at the movie theatre. You can reduce the frequency by cutting these entertainment outings in half.

Committing to your budget doesn’t mean you have to give up on your health goals, stop reading your favorite author or give up your video game fun! You can cancel your gym membership and head outdoors to stay fit. Join a free, local fitness group. Borrow paperback bestsellers, e-books and video games from your local library at no cost. All you need is a valid library card.

Sticking to it!

Now that you’ve firmed up your budget, here are a few great ways to stick to it.

Take control of variable expenses. Create categories for your variable expenses, such as groceries, entertainment, etc. Next, review your budget monthly or after each payday to determine how much you need to spend in each of the categories.

After that, set aside money to pay for each of the variable expense categories in the time allotted. Once the cash is spent, no additional spending can occur in the category until the next payday. Alternatively, you can adjust your budget to allow for more funds in certain categories and less in others. This tactic will help create a budget that’s not only realistic but one you can live with.

Establish your financial goals. Create goals with deadlines to keep you motivated and on track. If you already have an emergency fund, goals might include paying off debt, saving for a new car, or early retirement. Remember, your budget will change depending on your goals and your current financial needs. To make your goals a reality, you will need to adjust your spending. Make achieving your financial goals easier by setting up automatic payments or transfers from your account.

Allow for some fun. Designate a set amount of fun money, a.k.a. discretionary spending, each month. Even though this sounds counterintuitive, it can help keep spending on track.

Creating and sticking to a budget helps to clarify priorities and improves your chances of achieving your financial goals. Your budget is a powerful tool and one of the smartest ways to build a solid financial foundation. Use it to put yourself back in control of your finances starting today!