In our last blog, “5 Compelling Reasons for Creating a Budget,” we covered how a budget can alleviate stress, help set higher financial goals, and even work towards a more comfortable retirement.
Creating a budget is the first step in effectively managing your money. And, without question, it offers a number of long-term benefits.
MOST BUDGETS NEED TIME TO PERFECT
It’s easy to lay out your monthly expenses and compare them to your income. However, if that’s where you stop, you’ll find yourself confused and frustrated to why you’re consistently exceeding your budget month-after-month.
You may have set aside a portion of your income for entertainment purposes, and even managed to stick with it. However, there were still a number of smaller, yet very important expenses you might have leaf out - expenditures which add up over time.
- How many high-priced coffees do you buy daily?
- How often do you go to the movies, a sporting event, or concert?
- How frequently do you dine out, and where?
It’s those smaller, or miscellaneous, expenses which get overlooked when people develop their initial budget.
TRACK YOUR EXPENSES FOR 30-DAYS
When you’re ready to create a budget, first list all your monthly expenses and income.
Next, financial experts recommend categorizing your expenses such as housing, utilities, insurance, food, gasoline, clothing, and entertainment; leaving one final category titled ‘other’.
After listing and comparing your monthly expenses to your income, the next step is to begin tracking ALL expenses for the next 30 days. Regardless how small or if they’re a one-time purchase; list them all. One-time or unusual expenses would fall under the category ‘other’.
Tracking your spending over a 30-day period will show you where the majority of your money is being spent.
MINOR SPENDING ALTERATIONS COULD IMPROVE YOUR BUDGET
After tracking your spending for 30 days, the next step is figuring out where to cut costs.
Many consumers worry developing a budget may require significant changes in their lifestyle. Depending on the consumer’s situation, that might be true. However, a budget does not always require eliminating expenses. A budget may reveal which expenses may need to be simply reduced.
For example, take cable packages.
Many cable subscribers believe they’ll never be able to live without access to over 200 channels (most of which they don’t watch). Yet, there are other alternatives. It may require some research and creativity. For example, they could either downsize their cable subscription or swap cable for a more affordable $8.00 monthly subscription to Netflix.
What about your grocery bill? Are there areas you might need to cut back on? What food items do you need and which ones could you eliminate or reduce? Do you need a specific brand of shampoo? Or, could you buy a cheaper or generic brand?
IT'S NOT PERMANENT
Remember, even if you have to alter your lifestyle, it’s not permanent.
You might get a promotion at work, an inheritance, or – who knows - even win the lottery.
A change in your financial situation could lead to purchasing nicer and better things. Yet, before you go and upgrade your house and vehicle, you could also take your surplus and place it into a savings account, pay down outstanding debts quicker, or built up your retirement account.
In summary, tracking expenses over a 30-day period is necessary in creating a near-perfect monthly budget. Neglecting to track your expenses could result in overspending and confusion as to exactly why they consistently overshoot it.
Tracking expenses better identifies where alterations need to be made.
Once your budget is set, the next step is determining what you’re going to do with the extra cash you will have each month.