What you need to know to build and stick to a budget
Want to make a dramatic difference in your personal finances? The FCAA and our members recommend building and living within a healthy budget. Follow these tips on how to make a budget that will stick!
A budget is a plan that outlines how you intend to allocate your income to cover expenses and achieve your financial goals. Budgets show where your money comes from and where it goes each month, keeping your finances organized and more manageable.
This article will discuss the value of creating a budget, offer practical tips to make a budget, share common mistakes or pitfalls and ways to stick with your budget.
Why create a budget?
Understanding your finances – where your money comes from and where it goes – relieves stress, enables independence and helps you plan for the future.
- Having a budget relieves stress. Rising inflation, job changes and economic uncertainty cause anxiety for many people. Having a budget relieves some of this pressure by enabling you to better react to changes.
“A budget gives you the ability to ensure that your expenses don’t exceed your income and to plan for future expenditures. It is your most powerful tool in achieving both short-term and long-term financial health,” says Lara Ceccarelli, credit counselor and team mentor at American Financial Solutions, an FCAA member.
- Having a budget enables independence. When you have a plan for your monthly income and expenses, you have more control over how to spend or save your money. Following your budget prevents overspending and helps you pay off debt, save for an emergency fund, invest your money and grow in financial independence.
- Having a budget helps you plan for the future. Everyone has future goals, and often, those goals require money. Whether you are paying off student loan debt, saving for a house, sending kids to college or preparing for retirement, a budget will help. “Budgets arm you with the knowledge you need to meet basic monthly expenses and the knowledge to plan for emergency expenses or sporadic, larger costs (vacations, insurance premiums, veterinary expenses, etc.),” says Ceccarelli.
How to make a budget
Building a budget may feel like a difficult task, but with a little organization, you can create a workable budget.
To make the process as easy as possible, try the FCAA’s budgeting calculator – the Debt Freedom Tool. This tool is a free, helpful resource available with no strings attached. It will ask all the questions you need to answer to develop your budget. At the end, it will provide you with a free copy of your budget, recommendations for debt help and the opportunity to connect with a certified credit counselor, if desired.
To tackle the task of building a budget on your own, follow these steps:
Define your goals
Remembering why you are going through this process and what you hope to accomplish will help you remain committed and achieve your goals. Write your goals down or create a vision board – whatever will inspire you to keep going.
Determine your take-home pay
Figure out how much income you actually bring home each month after taxes, retirement contributions, insurance, etc. If your income fluctuates, track it so you can determine an average.
Organize your bills
“Gather every recent statement you can find from the last few months, then separate them [by month, then by priority],” advises Martin Lynch, president of the FCAA.
“Focus on the major recurring expenses first, such as rent or mortgage, utilities, car payment, insurance, etc. Ideally, have a few months’ worth, as that will help you determine what a typical month’s expenses are.”
Each month’s bills should be sorted according to their importance in the following categories: needs, wants, debt and savings.
Needs – Include major recurring expenses, as well as retirement contributions and food bills (though these may fluctuate throughout the year).
Wants – Expenses that are not critical to your or your family’s survival. This could include eating out, entertainment, most subscriptions or other items you splurge on.
Debt – This includes student loans, personal loans and credit card debt.
Savings – Include your emergency fund, retirement savings and any other savings.
Don’t forget to add expenses that may not come up every month, advises Lisa Ohnemus, director at Consumer Credit of Des Moines, an FCAA member. Set aside money for car repair bills, insurance payments and holiday spending. Also, make sure to track your spending for dining out and small everyday expenses. They add up!
Add all expenses to a spreadsheet or budget tracking app
Once all expenses are listed, you can start monitoring your spending habits. Keeping good records is the first step to seeing what you are spending each month and what category most expenses fall into.
Choose a budgeting strategy that fits
“There are a plethora of effective budgeting strategies. If you try one and it doesn’t work for you, try another,” advises Ceccarelli.
A common strategy is the 50/30/20 method. This means that you use 50% of your income to cover your needs. The remaining half would be split to cover your wants (30%) and fund your debt and savings (20%).
Other budgeting methods include a similar 60/30/10 method, an envelope or cash-stuffing method, zero-based budgeting and more. Find one that works for you.
Track and adjust your budget
Track your income and expenses each month. Watch for fluctuations and adjust your budget accordingly.
Some months you will spend more, perhaps because of a holiday or a cluster of birthdays. In other months, you should spend less. The goal is to find a balance.
You can use a budgeting app (make sure it’s trustworthy first!) or calculate your budget on a spreadsheet or on paper. What truly matters is that you have an accurate, working budget.
If you need help, a non-profit FCAA member credit counselor can walk you through the process, answer questions and offer helpful suggestions. Our members’ counselors are all certified and trained. As nonprofits, their goal is to help you as best as possible, without judgment.
Common budgeting mistakes and pitfalls
Creating a budget can be quite simple, but there are things people overlook or discount that should be on your radar. Keep away from budgeting pitfalls with these tips:
Allow flexibility but track accurately
“A budget is simply a way to see where your money’s going so you can stay focused on what matters,” says Ohnemus. “A few common mistakes when building a budget are making it so tight there’s no wiggle room … and just guessing instead of tracking real numbers.”
Apathy about small or fluctuating expenses
Watch out for small bills and fluctuating expenses, warns Ceccarelli. “It’s easy to fall into the temptation of saying, ‘This subscription is under $20, so it isn’t worth tracking.’ The problem is that people very rarely have only one small recurring cost. Even a $5 or $10 expense can add up if there are several of them.”
Additionally, it’s harder to manually track a fluctuating expense, like gas or groceries, than it is to track a fixed cost, like rent or a mortgage. “People tend to discount the role that these fluctuating expenses play in their monthly budget,” explains Ceccarelli. The numbers are harder to ascertain, leaving the person at risk of a serious shortfall at the end of the month or pay period.”
Revisit your budget again and again
“Remember, a budget is a living document. If you forget a few things or make a mistake, it isn’t the end of the world. It’s only bad if you don’t then adjust your budget,” says Sam Hohman, CEO of Credit Advisors Foundation, an FCAA member.
“Budgeting is not a ‘set it and forget it’ activity. Just like a road map, you have to keep referring to it to make sure you are on the right course,” Hohman says.
How to stick to your budget
Sticking to your budget is just as important as making a budget. Below, our experts share their top tips for sticking with your budget:
Remember the big picture
“If you’re taking the time to create a budget, there’s probably a reason for it,” says Ceccarelli. “On days when it feels impossible to stick to your spending plan, remember your long-term goals and be kind to your future self.”
“Passing up the coffee shop can be miserable until you realize you are one step closer to home ownership or a new car or whatever it is you are saving for,” agreed Hohman.
Think concretely about your dream
“Sometimes, it’s easier to think of your money like pieces of your dream,” Hohman added. For example, consider forgoing a new pair of shoes or a pricey dinner out and instead save for the new sofa you have been wanting for your home.
Make your budget sustainable
“People often try to implement an austerity budget when they first start. The problem is that budgets are a lot like diets. If you tried to eat salads every day for breakfast, lunch and dinner, you would (in all likelihood) eventually break down and eat a pizza. Budgets function the same way,” says Ceccarelli.
“If you cut all discretionary expenditures and leave yourself without any recreational outlets, you’re likely to end up frustrated and eventually walk away from your efforts. That’s why it’s important to build in some ‘mad money’ that you can spend on something you enjoy.”
FCAA member counselors are here to help
The peace of mind you will gain from building a sustainable budget can be life-changing. A budget can help you organize your finances, obtain independence and achieve both short and long-term goals.
FCAA’s non-profit member agencies are here to help you. As non-profit organizations, their goal is to help you build a budget and get out of debt. Their specially trained counselors can help you create a realistic budget and advise you on the best ways to get out of debt. Contact an FCAA credit counselor today to learn more.