How do you decide what to spend today, this month, or this year? Rather than make a series of ad hoc decisions, a budget can help you weigh all your needs and desires against your income—and set priorities. Creating a budget can also help you save for bigger-ticket items, like a new car, travel, or paying down debt.
Budgeting involves striking a balance between what you earn and what you spend. If these two categories don’t align and your expenses exceed your income, you could encounter cash-flow problems, run through your savings, or start accumulating debt. In today’s digital age, a number of apps can help you budget and track spending, including mint.com, goodbudget.com, and mvelopes.com, to name a few. In the meantime, here’s a checklist to get started:
• List all your monthly expenses and sources of income. Review your bank statement, credit card bills, and receipts; remember to account for items that you paid cash for.
• Identify your fixed expenses, such as a mortgage, loan payments, and insurance premiums.
• Identify your variable expenses and divide them into must-haves (utilities, transportation, food, and clothes) and nice-to-haves (eating out, entertainment, travel, and more clothes).
• Set a spending target for each category, so that the sum of all categories is less than your after-tax income.
• If you must cut back, variable expenses are a good place to start; you may have to manage fixed expenses, too. Could you move to less expensive accommodations, or lease a less expensive car?
• Monitor your spending for a couple of months and revise your budget as needed. Chances are you’ll find that you forgot some expenses and that you need to adjust some spending across categories.