Budgets are a valuable money management tool. Even if you’re happy with your financial health, budgets can keep you from slipping into bad habits and help you save a lot of money. Budgeting is an excellent way to get control of your spending.
If the word ‘budget’ makes you think of never-ending columns and rows, don’t worry. Budget methods make it easier to manage your finances once a budget template is in place. There are even budgeting apps for your smartphone that can help keep you on track.
First, collect financial records on the money you make (income) and the money you spend (expenses).
The following documents may contain information on the income you receive.
After you’ve collected your income records, you’ll need to collect receipts, invoices, or debit/credit card statements to determine your expenses.
First, identify your fixed expenses. These are the bills you pay every month, quarter, or year.
Next, you will need to determine your variable expenses. These are expenses that vary from month to month. Some of these expenses may be more of a want than a need. Yes, you need to eat, but do you need to eat out every night? If you have trouble separating needs from wants, you need a budget.
Deciding what is a want and what is a need won’t be the same for everyone. For example, you may require a high-speed internet connection if you work from home, but a lower-speed connection may be sufficient for surfing the web. Or, you may be willing to sacrifice a night out with friends to have money for a new coat.
You can use pencil and paper to create a budget or use a spreadsheet to do the calculations for you. Whichever method you choose, you’ll need to know how much income you receive each month.
If you’re part of the gig economy or a seasonal worker, you have a variable income. Developing a budget template can avoid a lot of headaches. The best way to determine a monthly income is to use the lowest-earning month as your baseline monthly income.
TIP: Be sure to list each source of income separately. It will make it easier to track and update when something changes. For example, if you get a raise!
Fixed expenses are those bills that appear every month, such as:
It may take a little more time, but it’s better to list expenses separately. Instead of entering a single amount under utilities, list each utility and the amount. That way, it’s easier to identify which utility needs adjusting.
Some utility companies offer a monthly payment plan that allows you to pay a flat fee each month. That can make it easier to budget. Just remember to look at the bill once in a while to make sure your monthly amount doesn’t need to change.
Irregular expenses are bills that are due at predictable times every year. They may be insurance premiums that are due twice a year or an annual vehicle registration. Make a list of the irregular, fixed expenses and the amount.
TIP: If you can’t remember all your irregular expenses, look at your bank statements. If you use online bill pay, you should identify the irregular expenses by the scheduled payment dates.
Total the irregular fixed expenses and divide by 12. This is the amount you should set aside each month. The easiest way to ensure the money is there when you need it is to set up a separate savings account. Every month, make a payment to this account. When an irregular bill comes due, you won’t have to scramble to come up with the money.
Look at the list of variable expenses:
Are there other items that need to be added? What about gifts? If you don’t put money aside for gifts, presents for friends and family could destroy a budget.
Review your expenditures from the last 12 months to determine what you paid on variable expenses. Be honest. If you think you may have overspent, don’t try to hide it. That’s why you need a budget - to better manage your finances.
TIP: If you feel that groceries should be part of your fixed expenses, separate groceries from take-out or dining out. Total the amount spent on groceries for six months and divide by six. That is the monthly budget amount to use for groceries.
Now you’re ready to total your expenses. Some people prefer to separate fixed from variable expenses. If you’d like to keep them separate, subtotal the fixed and variable expenses before creating a grand total. Subtract your total expenses from the income you calculated in Step 2.
Consider cutting back on variable expenses by eating out less or canceling a membership. You may need to consider adding income if you can’t eliminate expenses. Expenses should be less than your income.
TIP: To cut expenses, look at refinancing your home or finding a cheaper phone or cable plan. Compare internet providers for the best deals. Small changes add up. Skipping a daily $5.00 cup of coffee on your way to work lowers your monthly expenses by $100.
You need an emergency fund to cover unexpected expenses, such as car or home repairs. Try to keep the emergency fund around $1,000. If you don’t have a way to pay for emergencies, you will incur more debt to pay for unplanned expenses. Put some amount aside each month. Maybe it’s only $10.00, but it’s a start. Once you have an emergency fund, you’ll sleep better at night.
There are different ways to budget because one size doesn’t fit all. Here are some of the more popular methods.
Take a look at the different styles to find one that works for you. Then, look for an app or spreadsheet that aligns with your budget style.
At CCCU, we want to see our members succeed! We'd love to help you set up a new savings account for the money your budget helps you save. Visit any of our branch locations where our teams are ready to help!
