When it comes to our finances, many of us ignore taking the time to put together a healthy budget. Without one, it’s difficult to understand your money flow and nearly impossible to realize any financial goals. Is every budget healthy? We’ve put together steps to set a realistic budget to help you increase your savings.
Step 1: Classify Your Expenses
Classifying your expenses helps you understand where your money goes. Most expenses fall into one of the following categories:
- Fixed expenses: This category is for constant, predictable bills that must be paid every month such as utilities, mortgage, rent, and/or loans.
- Necessary spending: This includes expenditures such as groceries, gas, transportation and more. Although these costs fluctuate, you can usually calculate and average monthly spend on these items.
- Non-monthly costs: Most of us ignore this category since they’re random and don’t occur regularly. They range from car registration fees to summer camp to insurance premiums, among others.
- Savings goals: Why are you saving? This includes everything from money set aside for clearing debts to saving for a dream home or vacation.
- Discretionary spending: These types of expenditures include fun, leisure, entertainment, shopping and more. As they fluctuate every month, determine what remains after subtracting fixed expenses, goals and non-monthly costs from your income to set a limit on discretionary spending.
Step 2: Prioritize Your Money
Now it’s time to get serious. Identify where your money goes and compare it with your financial goals. You may need to reallocate or tighten the belt in certain areas like discretionary spending.
It’s advisable to save for retirement and emergency fund no matter how little remains after spending. These should be part of your budget. After that, get rid of high-interest rate debt followed by saving for other things such as saving for a dream home, college fund or vacation.
Ultimately, you’ll realize that creating and sticking to a realistic budget is a matter of tradeoffs. Can you achieve your prioritized goals with your spending? Reflect on your long-term plan and confront temporary limitations.
To accomplish the big picture, it’s prudent to cut back flexible costs and large recurring expenses. Create a separate account to store your savings and manage the desire to tap into it.
Step 3: Track Your Progress
It’s imperative to review your progress daily, weekly, monthly and yearly. Don’t be discouraged by falling off the wagon; checking up against your budget gets you back on track. Look at the progress towards the big picture periodically.
A realistic budget is a healthy one. Its success depends on discipline and getting real about your financial habits. We hope we’ve made the process easy to recalibrate goals, develop a plan, manage overspending, and ultimately increase your savings. For more information about savings and opening a Savings Account to help stick with your budget, contact us today!