Most people wouldn't set out on a road trip without a plan and a map. Likewise, you can't expect to reach your financial goals without developing a plan for spending and saving.
This is why the first step in creating a budget is to identify where your money is going. Knowing where you spend your money will help you make educated decisions on how to better manage it. Here are five simple ways to help you to keep better track of your spending.
Step 1: Divide your budget into basic categories
Begin by making a list of specific spending categories. For example: Housing, food, auto, entertainment, savings, clothing, medical, etc. You could also organize your expenses into needs - such as your car loan and electricity - and wants - such as vacations, hobbies, and entertainment. It might look something like this:
- Home (mortgage, upkeep, insurance)
- Auto (loan, maintenance, insurance)
- Food (groceries, restaurant purchases)
- Utilities (Gas, electric, water)
- Health and fitness (medical, gym membership, grooming)
- Travel and vacation
- Personal (entertainment, shopping, clothes)
Step 2: Know what to budget for each categoryFor example, in your housing category, you might list $800/month for rent, $25/month for renter's insurance, $125/month for utilities, and so on. Add them up for a total housing budget of $950.00 per month. If you don't know the exact amounts you spend, try and make close estimates.
Step 3: Assess how much you have to spendOnce you know what your regular expenses are, compare them with your paycheck amount. Are you ahead or coming up with a negative number? If you're in the red, go back to your monthly expenses and see if you can identify areas where you can cut back. If you're coming out ahead, take the extra money and allocate it to one or more of the following three group funds: Your flex money or emergency fund (readily available cash for unexpected needs - not wants), your savings fund (money that you put away for the future and try not to touch), and spending money fund (entertainment, eating out, etc.).
Step 4: Make AdjustmentsIf the bottom line of your budget proved that you are overspending your monthly income, you will come to the most difficult step - making cuts to your monthly expenses. There are many resources that can teach you to be smarter with the income you have, help you cut your recurring monthly expenses, and establish your financial boundaries for personal budget planning. Learn more about some of the best online money-management tools by trying out a few of the top-rated personal finance tools according to PC Mag. Mint.com and Yodlee.com both have excellent sets of tools that include email alerts before bills are due, alerts that tell you when you've exceeded your budget in a specific area and other features that can help you to keep your spending on track for the long term.
Step 5: Keep a journal
When you're just starting out with a new budget, it can be overwhelming to estimate how much you'll need. For the first few months, try to keep a weekly record of your spending habits. An easy way to get things started is to make a note on your phone. This will help keep your records in a central location rather than hunting down receipts. An online budgeting tool may be helpful by categorizing and managing your spending. Once miscellaneous purchases have been properly coded by category, the program recognizes recurring expenses, and seeing where your money goes becomes more visible. When you have an established budget, you will want to stay consistent. Making appropriate financial choices can help provide you with a peace of mind and could relieve you from living paycheck to paycheck.