Ask any financial coach or financial advisor how to create a budget and you will hear the same three steps: 1. Keep track of all your income and expenses for one month, 2. Calculate your net income or loss by subtracting your expenses from your income, and 3. Make changes for the next month based on what you found. You might even be given a basic budgeting worksheet as a nice framework.
So if the formula for creating a budget is so simple, why doesn’t everyone have one? Well, creating a budget is one thing, but creating a budget that you will actually use is another thing entirely. As a result, it is hard for anyone to get excited about putting time and effort into something if they don’t think they will actually use it over time. In other words, most of us know we need a budget, but then what? Instead of focusing on the fundamental structure of a budget, it is important to understand how to create a budget that can help you make better decisions with your money.
With all that said, here are three things to keep in mind for creating a budget that actually works:
1. Your budget should reflect your values and goals
It seems obvious that we would spend our hard-earned money on things that are most important to us, but the reality is we often don’t. If you take the time to track where your money goes – it probably will be an eye opening experience. To start, track all of your expenses for a month and then ask yourself if the way you spend money reflects what is actually important to you. Really evaluate your spending habits. Is it really important to eat out for lunch every day? Do you need that $5 cup of coffee in the morning? Bottom line, you need to determine if your spending habits are getting you any closer to the goals that are most important to you.
2. List out all of your expenses by priority
Now that you have recorded each and every one of your expenses for a month – arrange them by priority. This simple task allows you to see all the ways you spend your money – including the most frivolous of purchases. After sorting your expenses by priority, hopefully your “needs” will bubble up to the top and your “wants” be lower on your list. With this information at your fingertips, you now have the power to target areas where you waste money and that are keeping you from reaching other goals like paying down debts, freeing up money for a nicer apartment or even supporting a charity. Ok then, but there is one more step you need to take to make your budget really work for you...
3. Did you remember to include savings?
Would you believe that a lot of people leave “savings” out of their budget? Well, they do and it is a big no-no. Your budget needs to reflect all they ways you use your money each month – and savings is no exception. If anything, savings should be in the “need” category and at the top of your list. If you have ever heard the expression “pay yourself first,” putting savings as your number one priority is how to make that happen. At a minimum, your savings goals should include an emergency fund, retirement and down payments for big ticket items like a home or a car.
These three simple tips will help you create a budget that reflects your lifestyle and values. As importantly, you will have a budget that you can really use to help you reach the financial goals most important to you.
This guest post was provided by our partner, Financial Education & Literacy Advisers (FELA). FELA provides personalized employee financial wellness solutions through its web based application called LifeCents. Login to Purchasing Power and view our Financial Resourcesto learn how LifeCents can help you get control of your financial life.