Since the new year has arrived, it’s the perfect time to make setting a budget – and sticking to it – your No. 1 resolution to keep.
Setting a budget is easy, just follow these simple steps and you’ll be on your way to a better financial future.
- Gather every financial statement you can. This includes bank statements, investment accounts, utility bills and any information regarding a source of income or expense.
- Record all of your sources of income. Be sure to include any outside sources of income. If your income is in the form of a regular paycheck where taxes are automatically deducted then it's fine to use your net income, or take home pay. Record this total income as a monthly amount.
- Create a list of monthly expenses. Write down all of the expenses you plan on incurring over the course of the month. Include your mortgage payment or rent, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, retirement or college savings and essentially everything you spend money on.
- Break expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the same each month and are required parts of your way of living. Examples include your mortgage or rent, auto payments, etc. Variable expenses are those that vary from month to month and may include groceries, gasoline, and entertainment. This category will be important when making adjustments to your budget.
- Total your monthly income and monthly expenses. If your end result shows more income than expenses you are off to a good start. This means you can prioritize this excess to areas of your budget such as retirement savings or paying off more of your debt. If you are showing a higher expense column than income it means some changes will need to be made.
- Make adjustments to expenses. If you have accurately identified and listed all of your expenses the ultimate goal would be to have your income and expense columns be equal. This means all of your income is accounted for and budgeted for a specific purpose. If your expenses are higher than your income you should look at your variable expenses to find areas to cut.
Review your budget monthly. It is important to review your budget on a regular basis to make sure you are staying on track. After the first month take a minute to compare your actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve.