A recent poll showed that only 41% of Americans have a budget.1 Are you in this group?
Maybe you’ve tried to manage a budget and had a tough time with it. Or perhaps it seems overwhelming. Budgeting can be easier than you think, however.
By following one simple step at a time, you can build your best budget and give yourself a better chance of improving your financial well-being.
The first step is to take a financial inventory by figuring out exactly how much money you have coming in and how it’s being spent. To calculate incoming money, think beyond just any wages you’re earning. If you’re taking funds in from other sources (such as Social Security), that should be accounted for too. Next, calculate your expenses by documenting every dollar you spend in a month, from your mortgage payment all the way down to that coffee at Starbucks.
Once you’ve taken your financial inventory, the next step is to break your expenditures down into categories.
There’s no right or wrong set of categories, but in general, you’ll want to create a category for recurring items that don’t change in cost (such as your mortgage payment), another for necessary items that have an adjustable cost (groceries and clothes, for example) and another for “wants” (meals at restaurants, weekend getaway vacations, etc.).
Now that you’ve gathered and analyzed information about your finances, it’s time to create your actual budget.
Essentially, you’ll outline how much you plan to spend in each category — but be as specific as possible. For example, don’t simply project spending $500 in your “necessary items with adjustable cost” category. Instead, specify $300 for groceries, $100 for clothes, and $100 for household supplies. The more detailed your budget is, the easier it will be to adjust as needed later down the road.
If you have a spouse or a family, it’s important to include them in the budget-development process. If they have a say in and understand household spending goals, they’ll be more likely to do their part in helping stick to the plan.
Once you’ve created your budget, find a tool that will help show you how closely you’re following it. Like the budget categories, there’s no right or wrong budget tool — it can be as simple as paper and pencil or higher-tech like a software program or app. What’s important regarding this step is to pick a tool you know you’ll actually use.
The final step in building your best budget is an ongoing one: making adjustments on a regular basis.
At first, you may want to adjust every week until you get more comfortable with the process. After that, you should re-evaluate your budget at least once every quarter or any time you have a significant change in your financial inventory. Budgeting is meant to be a long-term practice, so it’s important to be flexible and adaptable.
For more detailed help with building and maintaining your budget, take a look at our budget guide.
Now that you’re armed with the tools to build your best budget, don’t delay — the sooner you get started, the better chance you’ll have of accomplishing your goals and getting to where you want to go.