Evaluate Your Income
The first step to creating a successful budget is knowing exactly how much money you bring in each month. This step gives you an accurate foundation to build the rest of your budget, including bills and utilities, loan and credit card payments, other spending needs, and savings and investment contributions. Your finances have likely undergone many changes over the past few years, so you want to give yourself the best chance at success by getting a clear view of your financial picture.
Review Your Spending
Your spending habits have likely also changed significantly over the past few years, especially with price increases for groceries and household supplies. When examining your expenses, start by identifying all your fixed expenses and their costs, including regular monthly bills like rent or mortgage, utilities, car payments, etc.
Next, list your variable expenses (things that may change from month to month), including groceries, gas, and other essentials. Though your variable expenses are less consistent, it’s still important to set general limits in this area to help keep you on track with your overall budget.
Identify Needs vs. Wants
Once you’ve analyzed your spending for your needs, you’ll review your wants. This is anything outside of essential expenses and includes optional purchases like dining out, shopping, entertainment, and other various costs. This category typically presents the most opportunities for you to cut back or move funds around. You can certainly still have fun and give yourself little treats here and there! But if you notice an excess of spending in a particular area, plan to cut back and use that money somewhere else in your budget that will be more beneficial.
Save Before Spending
One all-too-familiar savings strategy is to spend first, then use the remaining funds left over (if any) to put into savings. Unfortunately, this approach makes it easy to view savings as an option rather than a critical component of your budget.
Viewing savings as an afterthought makes setting and reinforcing consistent savings practices even more challenging. Instead, think of your savings contributions as a fixed expense and factor it into your budget as such. This practice, also known as “paying yourself first,” is a proven way to stay on track and achieve your savings goals.
Prioritize Debt Repayment
Keeping your overall debt balances low is essential to protect your credit score. Consistently paying down your debts and keeping your credit utilization at a minimum allows you to save extra money on interest charges, plus reduce the financial stress of lingering debt. Even if you are working to save money for something big, it’s still important to prioritize reducing debt as much as possible. Continuing to pay down debt – or even wiping it out entirely! – will free up even more room in your budget and make it easier to achieve your financial goals.
Now that you’ve put in all the work to build your budget, proper planning is the best way to stay on top of your newly crafted strategy! As you approach each new month, take the time to review and plan out the expenses and activities you have lined up for that month and the months following. For example, suppose you have an upcoming event to attend or plan to travel. In that case, you will know ahead of time to factor in any associated costs and adjust your budget accordingly to ensure you have the funds to enjoy these events and lessen your financial stress.