Budgeting Saving

7 Steps to Make a Budget You Can Stick To

Written by Rebecca Lake

Planning to save money and actually doing it are two very different things and closing the gap starts with having the right tools. A carefully crafted budget is the most effective weapon you can have when taking charge of your financial destiny is the order of the day.

Making a budget isn’t rocket science but you do need to know how to approach the task. Following these simple steps can put you on the fast track to saving more in no time.

1. Check your mindset

Some people wholeheartedly embrace budgeting but others avoid it like the plague, and it’s often because they don’t really get the concept behind it. They adopt this mentality that living on a budget is all about restricting what you can do with your money when actually it’s designed to give you financial freedom.

In the simplest sense, a budget is an accounting of what you’re spending each month versus how much money you have coming in. If you look at your budget as a plan for how you’re going to use the resources that you have instead of a form of financial punishment, it’s much easier to stick to it and make it work for you in the long run.

2. Track your variable spending

Getting your budget going starts with figuring out where all of your hard-earned dollars are going. That means getting a grip on your variable expenses, which includes things like clothing, entertainment or anything else that’s not a regular monthly bill.

There are a few different ways you can track your spending and the method you choose really depends on your preference. If you like to do things by hand, you could just write down everything you spend at the end of the day. If you want a record keeping method that’s a little simpler, linking your checking or credit card accounts to a budgeting app like Mint is a hassle-free way to record expenses.

You can also keep tabs on what you’re spending with a spreadsheet and there are plenty of free and low-cost versions available online. When you’re comparing paid spreadsheets to the free options, make sure you check out all the different bells and whistles to see if the cost is worth it.

3. Add up your fixed expenses

Once you’ve gotten a grip on your variable expenses, it’s time to turn your attention to those expenses that stay the same from month to month. That means things like your rent or mortgage payment, insurance premiums, cell phone bill, utilities, and debt payments. These are the expenses that you need to be accounting for first in your budget each month.

You also need to factor in fixed expenses that you pay periodically throughout the year. For example, if you’re self-employed you’d want to include your quarterly estimated tax payments. If you own a home, you’d need to account for things like property taxes and homeowner’s insurance.
If you’re doing your budget on a monthly basis, the easiest way to fit these costs in is to average them out annually. If your property taxes come to $700 a year, for instance, you’d need to allocate $58 a month for that expense category. Breaking it down monthly takes some of the hassle out of coming up with the money all at once when the bill is due.

4. Subtract all your expenses from your monthly income

Now that you know what your fixed expenses are and what you’re spending on discretionary items, you can move on to the next step. That means adding up all of your expenses and subtracting them from your income.

This step shouldn’t be too difficult if your check is roughly the same every payday. If your income isn’t consistent because you freelance or work on a tip basis, however, you’ll need to take a different approach.

First, establish a baseline of what you need to make each month to cover the essentials. Next, look at your income over the last six to twelve months and calculate what you’re making on average and use it as your guide for setting your budget. That way, you can save the extra in months when your income is higher to counterbalance those periods when it’s lower.

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5. Give your spending a second look

Ideally, you want to have money left over once you take out all of your expenses. This is the money you’ll use to begin growing your savings cushion. If you don’t have anything left over or if you end up with a negative number, that’s a sign that you’re overspending in one or more areas.

At this stage, you should be focused on fine-tuning your budget. Go over every expense you have to see if you can reduce it or get rid of it altogether. For instance, it may be possible to scale down your grocery spending by using coupons or switching to generic brands. You could cut out things you don’t need like that gym membership you never use or premium cable.

When you’re making cuts, look at each dollar you’re not spending as a dollar you can save. Even cutting $50 a month from your budget will put an extra $600 in your pocket by year’s end. The more fat you can trim, the more your bottom line will benefit.

6. Establish your savings goals

Carving out some savings in your budget is pointless if you have no idea what to do with it. Just sticking it into a savings account is fine but without a goal to keep you motivated, it’s easy to lose steam.

When you’re setting your goals, it’s important to make sure you’ve got your priorities straight. The first thing you should be saving for is an emergency fund if you don’t have one. This is a reserve of three to six months’ worth of cash you can tap if you lose your job or your car breaks down. This is money you’d want to keep liquid so you can get at it quickly if you need to.

Once you’ve got your emergency fund in place, the next item on your list should be retirement savings. If you’re already making contributions to an employer’s plan, bump up your salary deferrals so you’re maxing out the plan each year. At the very least, you should be saving enough to get the company match. If you don’t have a 401(k), funding an IRA is the next best thing.

After you’ve got these two bases covered, you can assess what else you want to save for. That could include a down payment for a home if you’re still renting, cash for a new car or a college fund for your kids if you’re parent.

When setting your savings goals, make sure you give them a deadline and outline clear action steps for hitting your target. For instance, if you want to save $5,000 in your IRA for the year, you’d have to figure out what you need to set aside each payday to do it. Being as precise as possible gives you a clear roadmap for reaching your goals.

7. Make it automatic

Saving money is a habit and if you’re not used to doing it, it can be a hard adjustment to make. Automating your savings takes some of the pressure off so that you’re not tempted to spend the money as soon as it hits your bank account.

With your retirement accounts, you should already be electing to defer part of your salary automatically into your employer’s plan. If you’ve got an IRA set up at a brokerage, check with your employer to see if it’s possible to have a portion of your paycheck rerouted into that into via direct deposit. If not, you can schedule automatic transfers from a checking or savings account.

The same goes for your emergency fund or other targeted savings accounts, such as a down payment fund or 529 plan. Depending on how often you’re paid, you can schedule transfers in advance on a weekly, biweekly or monthly basis. After the first few transfers you might find you don’t even miss the money that’s coming off the top.

Consistency is key

Growing your savings doesn’t mean you have to be resigned to living on a rice and beans diet for the rest of your life. It all comes down to putting a budget in place so you can find the money to save, then sticking with your plan.

Following the action steps we’ve outlined here is a good starting point but it’s not a once-and-done proposal. Be sure to schedule periodic check-ins to see how much progress you’ve made towards your goals. While you’re at it, take a fresh look at your budget each month to make sure you’re maximizing every dollar.


About the author

Rebecca Lake

Rebecca Lake is a personal finance writer and blogger specializing in topics related to mortgages, retirement and business credit. Her work has appeared in a variety of outlets around the web, including Smart Asset and Money Crashers. You can find her on Twitter at @seemomwrite or her website, RebeccaLake.net.

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