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Setting Up a Budget
If you are like many people, one of your new year’s resolutions was to get a better handle on your spending. (And if that was not one of your resolutions, perhaps it should have been.) To do a better job handling your money, you need a budget.
The first step in budgeting is to determine what you spend. Keep a spending journal for at least a month. Write down everything, from your home mortgage to your groceries to that extra latte in the morning.
Then, categorize your spending into set expenses, variable expenses, periodic expenses and extras. Set expenses are bills you pay every month in the same amount, such as your mortgage, your car or student loan, your health insurance premium. Variable expenses are bills that you pay every month but that can vary, such as gas, groceries and utilities. Periodic expenses are things like your property taxes, health care, car repairs and holiday gifts, and extras include things like entertainment, travel, etc.
Next, compare your income to your expenses. If the total of your expenses is more than the total of your income, it is very important that you establish a budget – and stick to it. But even if your expenses are not greater than your income, you can benefit from looking at ways you could put away a little extra every month.
Decide how much you want to save each month. As a rule of thumb, you should have an emergency fund -- equal to several months of expenses -- that you can tap without having to liquidate assets. You also should be saving for your retirement. If you have kids, you might want to save for their college education. And you might also be saving for a long-term goal such as buying a house or taking a dream vacation.
You can make it easier to meet savings goals by eliminating waste from your budget. In order to do this, look at each spending category.
Set expenses These are usually the most difficult to adjust. Yes, you could move to a cheaper apartment or refinance your mortgage, or you could sell your car – and if your financial situation is dire enough, these may be options you want to consider. But otherwise, there is little you can do on a day-to-day basis to lessen those expenses.
Variable expenses. Often there is more you can do to control your spending in this area. For example, you can cut back on utilities by turning down your heat, turning off your lights, changing to a cheaper phone plan, etc. Consider taking public transportation to work so that you save what you are spending on driving and parking.
Periodic expenses. In addition to paring back on some of these expenses, such as holiday gifts, the issue here is to budget so that you have the money when you need it. You can take the total of each expense, divide by 12, then save that amount every month. That way you won’t end up short when the bills come due.
Extras. This is where most people are surprised to find out how much they are spending – and how much they can cut. Could you go out to dinner or buy clothes less often? Rent a movie instead of going to the theater? Bring your lunch to work instead of eating out? And don’t forget to look at fees – such as late fees on bills or overnight shipping fees on gifts – that you could avoid if you were a little more organized.