When it comes to personal finance there is one word that makes almost everyone cringe… Budgeting. Most people feel that maintaining a budget means that it will be the end of all of the “fun”. In reality, establishing and following a sound budget does just the opposite. It not only allows you to control your spending, but also is the foundation to achieve the financial goals you truly desire.
Here at Callahan Financial Planning we simply define a budget as providing for your needs within scarcity, which is the limited amount of money available to you. This means living within the amount of money you earn while taking care of your needs. The goal of having a budget isn’t to restrict your spending, but to cover all your necessities and focus any remaining money on what is most important to you. Budgeting forces you to take an in depth look at where your money is currently going and decide if that’s where it should go in order to accomplish your true goals.
In order to create your budget, follow these five simple steps:
- Determine your monthly net income The total amount of take home money from each paycheck (your gross pay less your deductions). Remember that if you are paid bi-weekly multiply your average paycheck’s net income by 26, then divide that by 12.
- Identify your spending To do this simply gather your bank and credit card statements as well as any receipts on cash purchases. Then separate your spending by discretionary and non-discretionary. The main object of a budget is to ensure that all of your necessities are covered and then allocate your remaining funds according to your goals. It’s important you identify all spending for a month, so you can truly understand where your money goes (you’d be surprised how much a few value meals and gourmet coffees can add up to in a month). This will also help you finds areas where you can reduce or increase spending if needed.
- Outline your goals Write down specific goals and what you estimate it will cost to achieve them. Now that you have an understanding of your spending habits, you can determine if your spending is in line with your short and long term financial goals, and make any necessary changes.
- Plan out your ongoing budget After you have detailed exactly where your money is going and what your goals are, prioritize your spending by what is most important. Whatever your goals may be such as: preparing for retirement, paying for college, paying off debt, investing or saving for a home, you need to have a plan and stick to it in order to be successful.
- Track your progress This will allow you to hold yourself accountable, and also see how significant the effects of a sound budget really are. This is where the transformation starts to happen, when your current spending habits are in line with your goals, you will begin to see them come to fruition.
Everyone needs a budget. Whether you make $30,000 or $300,000, you will be much better of with one. It may take some discipline and a few changes when you start but controlling where you spend your money will allow you to prepare for and help you accomplish your financial goals. To find out how one of our Professional Financial Planners can help you identify your goals and guide you towards accomplishing them click here.