Personal budget tips

If you want to control your spending and work toward your financial goals, you need a budget.

A personal or household budget is a summary that compares and tracks your income and expenses for a defined period, typically one month. While the word “budget” is often associated with restricted spending, a budget does not have to be restrictive to be effective.

A budget will show you how much money you expect to bring in, then compare that to your required expenses—such as rent and insurance—and your discretionary spending, such as entertainment or eating out. Instead of viewing a budget as a negative, you can view it as a tool for achieving your financial goals.

What a Budget Does

A written, monthly budget is a financial planning tool that allows you to plan how much you will spend or save each month. It also allows you to track your spending habits.

Though making a budget may not sound like the most exciting activity (and for some, it’s downright scary), it’s an important part of keeping your financial house in order. That’s because budgets rely on balance. If you spend less in one area, you can spend more in another, save that money for a large purchase, build a “rainy day” fund, increase your savings, or invest in building wealth.

Ultimately, the result of your new budget will show you where your money is coming from, how much is there, and where it all goes each month.

To create a budget that works and allows you live a comfortable and happy life, you need to get a firm handle on what you’re currently spending, what you can afford to spend, and what your priorities are.

Before you begin, gather up all your financial statements. You want to have access to any information about your income and expenses. One of the keys to the budget-making process is to create a monthly average. The more information you can dig up, the better.

How much income can you expect each month? If your income is in the form of a regular paycheck where taxes are automatically deducted, then using the net income (or take-home pay) amount is fine. If you are self-employed or have outside sources of income, such as child support or Social Security, include these as well. Record this total income as a monthly amount.

Write down a list of all the expenses you expect to have during a month. Use your bank statements, receipts, and credit card statements from the last three months to identify all your spending.

If your income is higher than your expenses, you are off to a good start. This extra money means you can put funds towards areas of your budget, such as retirement savings or paying off debt. If your expenses are more than your income, that means you are overspending and need to make some changes. If you’re in a situation where expenses are higher than income, find areas in your variable expenses you can cut. Look for places you can reduce your spending—like eating out less—or eliminate a category—like cancelling your gym membership.

How to use your budget

After you have set up your budget, you must monitor and continue to track your expenses in each category, ideally every day of the month. The same budgeting spreadsheet or app used to make your budget can also be used to record your expense and income totals.

Recording what you spend throughout the month will keep you from overspending and help you identify unnecessary expenses or problematic spending patterns. Take a few minutes each day to record your expenses, rather than putting it off until the end of the month. As you use your budget, keep an eye on how much you have spent. Once you have reached your spending limit in a category, you will either need to stop that type of spending for the month or move money from another category to cover additional expenses.

Your goal in using your budget should be to keep your expenses equal to or lower than your income for the month. Once you have set up a basic budget, customise it according to your financial situation and goals.

If you work on commission, be aggressive in saving to help cover periods when the market is slow.

If you have cash flow issues because you are paid only once a month, divide that payment by weeks, and keep the cash you planned to spend in remaining weeks in a separate account until you need it.

Adjust your budget monthly if you find you overestimated or underestimated your expenses. Keep an eye on large expenses that only occur every few months, such as insurance payments.

If you tend to overspend in certain categories, use budgeting hacks such as switching to a cash-only budget.

Once your expenses are lower than your income, budget towards savings goals before you increase your spending. Take time to learn other financial skills to improve your financial literacy and make your money work harder for you.— The Balance