When it comes to taking control of your finances, budgeting is essential to success, but that doesn’t necessarily mean people enjoy it. For most people, budgeting is akin to going to the dentist, necessary but painful. But budgeting doesn’t have to be a tiring and consuming chore, and it can instead be a useful tool for all consumers, both those in debt and those financially stable, to keep their finances organized and under control.
With the average American household owing more than $15,000 in credit card debt alone, budgets should be an essential part of every household—it should also be noted that over 45% of American families carry credit card debt!
Ready to get started?
By reading this article, you have taken the first step in amending your finances. Here are the next steps you should take in setting up your budget.
Set Your Goals
Start your budget by listing out your financial goals.
What exactly do you want to achieve in your lifetime? Whether you want to pay off credit cards or retire early, break these goals down into two different categories: short and long-term. Your short-term goals should take less than a year to achieve. These could include paying off credit card debt or even increasing your emergency savings. Long-term goals, as the title suggests, take significantly longer than a year to accomplish.
These goals could take years or even decades and can include saving for retirement, your children’s college expenses or paying off your home mortgage. Determine which goals you’re aiming for and sort them in order of priority and importance. This step will help you decide how much to put aside each month for each goal when you build out your budget.
Understand Your Income
The most important part of setting up a budget is understanding your income.
You must know how much money you are bringing in before you can efficiently achieve your short and long-term goals. If not, you will only end up getting yourself into more debt. Unfortunately, overestimating your income is easy to do. That’s why it’s important to subtract the things that come out of each paycheck, like Social Security, taxes and 401(k) contributions. This is your net income, or the money you take home after all of the deductions are removed.
Make a list of all of your incoming cash flow and total it. You can use the method that works best for you, whether it is a spreadsheet, pen and paper or a helpful app on your smartphone. (You can also download our monthly income worksheet to help you get started.) If you aren’t able to list your net income due to earning fluctuations, lack of records or other uncertainties, try to estimate the fairest and accurate income figure. It is better to underestimate your income than overestimate and spend outside of your budget.
While it might be daunting, it is necessary to list out all of your debts. From your home mortgage to your credit cards and even student loans, detail the following:
- Total amount owed
- Interest rate
- Amount due each month
- The amount of any late fees or other factors.
This will help you determine which debts to focus on in the coming months. If your debt list seems overwhelming, it might be time to contact one of our credit counselors for help in dealing with your debt.
The next step is to gather your expenses and list them with your debts and income. We recommend tracking your spending for a month then reviewing your purchases. This will give you the most accurate representation of your expenses and spending habits. You can organize these costs into four different categories:
Fixed expenses occur every month, and the dollar amount usually doesn’t change. These items can include mortgage or rent, childcare, insurance or car payments. Variable expenses also occur every month but vary from month to month. These include food expenses, utilities or credit card payments. Periodic expenses occur regularly, but not monthly, and can include medical expenses, home and auto maintenance, membership dues and life insurance premiums. Finally, discretionary expenses are the purchases that fall outside of one’s needs. These luxuries include vacations, gifts, personal care and entertainment.
Creating Your Budget
Once you have detailed your income, debt and various expenses, determine if your budget creates a surplus or a deficit. If your monthly income exceeds your expenses, you have a surplus. At this point, you should be patting yourself on the back because you are handling your finances pretty well.
However, if your monthly expenses are higher than your income, you have a deficit. You will have to reevaluate your budget and cut back on some of the unnecessary expenses.
This is the part that most people don’t like to hear.
While you might be picturing endless boredom and deprivation, you couldn’t be farther from the truth. Cutting back could be as simple as skipping your second Starbucks run of the day or finding a less expensive hotel for your family vacation. You can also try taking a part-time job or working overtime to help reduce the deficit.
If this process seems overwhelming to you, it might be time to get some help from the professionals. Our credit counselors are experienced in helping customers get and stay out of debt. They can help you reduce and eventually eliminate your debt. They will also help you create a budget and teach you healthy spending habits for the future. Want to know more? Contact one of our credit counselors today at 800-500-6489!