A realistic and responsible budget is the bedrock of a financial plan. Building a budget may require close self-examination at first, including coming to terms with where your money is going or how you can cut back on unnecessary expenses, but doing so will help you focus on your goals.
Here’s how you can get started.
1. Examine your financial objectives.
Before you can establish a budget, you should have an honest conversation with yourself – and those in your household – about your financial goals. Start by making a list of your short-term goals, like a new car or a summer vacation, and your long-term goals, like your children’s college fund and your retirement.
You’ll want to determine how important it is for you to accomplish each one of these goals. This will help you prioritize and focus on the most important objectives first. You’ll likely have multiple objectives you’re working toward at the same time.
2. Identify your current monthly income and expenses.
To make a detailed list of your income and expenses, you can write them down or use a software program or app to help you.
In calculating total income, in addition to your regularly salary, don’t forget to include income like child support, alimony, rental income, gig work pay, dividends and interest.
To see where you have choices in your spending, separate expenses into two categories: fixed expenses and discretionary expenses. Fixed expenses include things you are required to pay, such as housing, food, clothing and transportation. Discretionary expenses include optional spending such as entertainment, vacations and hobbies. Be sure to identify out-of-pattern expenses, like holiday and birthday gifts, car maintenance, medical bills and home repair. It helps to look through credit card bills, online banking, checkbooks and other receipts so you don’t forget anything.
As you’re listing expenses, consider your financial goals. If you can treat your goals as expenses, this will help you include them as part of your budget and contribute to them regularly.
3. Evaluate and adjust your budget.
If your income total is larger than your expenses total, you’re on the right track, especially if you’ve already included figures for some of your financial goals in the budget. You’ll want to examine any extra income and determine how best to use it. Can more go toward your short-term or long-term financial goals?
If your expenses are higher than your income, then you’ll need to make some adjustments to bring your expenses down to be lower than your income. Take a careful look at your expenses and determine which can be cut back. Don’t be discouraged if you find yourself coming up short. Remember that discovery and recalibration were the reasons for the budgeting exercise. With some determination and self-discipline, you’ll be able to find a budget that works for you.
4. Continuously monitor your performance against your budget.
Once you’ve found a budget that works for you, you’ll want to check in periodically to make sure you don’t need to make any tweaks. Of course, if you experience a change in your income or expenses, you’ll want to revisit the budget and adjust as necessary. Otherwise, you should be comfortable enough with your budget to not track every single penny and be prepared for unexpected expenses that may come your way, like a home or car repair.
A budget that is too rigid may set you up for failure, so be flexible and recognize when you may have to make a shift.
Understanding your income and expenses thoroughly will give you a greater sense of control and set you up for future financial success. If you incorporate your budgeting practice into daily life, it will not only help you manage your money more effectively but will give you confidence that you’re prepared for whatever life has ahead.
This material has been created by Raymond James for use by its financial advisors.
