Many people are struggling to gain control of their finances. According to a LendingTree report in 2017, four in five Americans are in the red—and a quarter of those in debt do not have a plan to pay it off. By building a budget, you can gain clarity into your financial situation. This is a vital, first step that will help you chart a route to a far more sustainable place.
Here are the key steps in building a basic budget:
Set a Date
Building a budget requires time and patience; don’t set yourself up for failure by starting the process at a point in the day when you don’t have time to see it through. Peering into the cold reality of your finances can be an overwhelming and disheartening task, so take away any time stressors. Make a date for your budget by choosing a slot in the week where you’ll have a few hours to invest in the process. Invite anyone else who may need to be included—and even think about making a few snacks to power you through the process. Rather than approaching it as a chore, see this as a project that’s leading to your stability and peace of mind.
Choose Your Format
Are you going to use a spreadsheet? There are several great free templates online that you can download and work from. There is also a whole ecosystem of software tools that automate the process and increase accuracy. Or perhaps you’re far more comfortable with pen and paper. Choose a format that makes sense to you. As you build that budget, identify your goals. Are you trying to pay off a large medical bill? Do you have credit card debt to reduce or are you saving for an addition to the house? Identify what your realistic goals are, both short-term and long-term.
Gather Your Data
U.S. News recommends that you physically bring together all your bills, credit card reports, bank information, and paychecks. Spread this paperwork out on the table and gather the digital versions in your devices. Separate them into two parts: incomings and outgoings. Then start inputting all of these items into your monthly budget.
As you build out your budget, insert your income at the top—such as work, investments, and freelance projects. Then you’ll insert the various costs below. The first will be fixed costs such as utilities, mortgage or rent, and insurance costs. Then you can list discretionary costs—like gas, food, and entertainment. Don’t forget items that often go under the radar, such as car registration, memberships, and subscriptions.
Analyze the Data
Now comes the moment of truth: add everything up. If you earn more than you spend, congratulations, you have a surplus. If you spend more than you earn, the important thing is to spot the trend now and start correcting it. It’s vital to your long-term financial health that you see things realistically.
Now you can dig into the numbers and identify areas you can cut down on costs. Your fixed costs may be fixed—as the name implies—but perhaps you could find a better deal for some of your bills, such as your internet provider. If you have credit card debt, figure out how much you can pay off each month—you’ll want to do more than the minimum if you can. You can also review the dates for each payment. If they’re huddled close together in the month, see if you can spread them out.
Continue to work with the numbers until you get to a place where you can balance things out. Your discretionary costs are usually where the most cost cutting can occur. How much is that daily latte coming to on a monthly basis? You may also need to identify new sources of income to bring in.
Set a target for your costs for next month. If you’re giving yourself a limit for your spending on items such as groceries, one tried and true method is to put cash into envelopes for certain purchases, such as your weekly grocery shop or your money for lunch at work.
Then, as you move ahead, make sure you revisit your budget on a regular basis. Keep coming back and tweaking, and checking your progress on this document. By sticking with it long-term, you’ll start to see the gains and that budget may start to feel like your closest ally.