While budgeting is not necessarily anyone’s favorite part of the financial planning process, it’s important because it quickly uncovers opportunities and problems. Here are 5 steps to building a budget.
Step 1: Review the past year.
See where money went, what changes you can make and how to budget for the upcoming year. You can compare how much money your household brought in and see where it all went throughout the year to by reviewing your online account statements. I’m in charge of paying the bills in my household and budgeting is something that I want to do better this year. So, knowing how much I spent last year has given me a better idea of how much I need to set aside each month for my expenses this year.
Step 2: Predict the future.
Next, you’ll need to add in what new expenses you may need to add to your budget. For example, you may have one (or four) weddings you plan on attending this year, you can price out what you’ll need to save for those parties. Maybe you have a family vacation planned for this year and you know you’ll need some extra spending cash. You can budget for all that now ahead of time and save yourself some stress by putting money in a separate savings account. Setting money aside in separate accounts has been important to us, because our year is full of events that we must attend.
Step 3: Adjust as necessary.
With all the numbers laid out, you can really see whether your cash flow is heading where you want it to go. You might find that your expenses outweigh your income – a big no-no for good financial health. Or that you spend more than you’d like on discretionary items while coming up short on savings. If this is the case, spot where you can adjust your spending. Cut back on those unnecessary purchases. My husband and I are working on not eating out as much during the week, and tracking our purchases in online banking. We also frequently ask ourselves whether what we want to buy is a need or a want.
Step 4: Know your goals.
Beyond having to pay for your current bills, save money for fun events, you’ll want to think about financing for your future. This is a huge category for us. Our primary goal is to pay off some debt to make our financial profile look better. We know our goal and budgeting will help us achieve that goal.
Step 5: Make room for change.
You have everything laid out, it looks perfect, you’re ready to start and you realized this is a big step and a huge change for your family. Making room for change can be hard, but it will better you and your financial goals.
Until next time,