Creating — and
sticking to — a household budget is the cornerstone of a sound personal financial
plan. Here’s how to make one in 10 simple steps.
1. Pick a system. There’s no shortage of budgeting apps and online tools available.
You can also use a basic electronic spreadsheet or even pen and paper, if you prefer.
But whatever your approach, select a convenient and flexible system to capture and
categorize your income and expenses over time.
2. Track current
spending. Keep track of everything you buy for a month to have a
realistic picture of your spending before you start. It can be surprising
how many purchases occur under your radar — like that occasional latte, magazine
or fast-food lunch.
3. Log Your Income. Record income from your job and any other sources, like a side hustle
building websites or selling handmade jewelry on Etsy. Don’t forget to include investment
or retirement income as well.
4. Record Fixed
Expenses. These are costs that remain relatively
stable over time — things like your mortgage, insurance premiums or car payment.
5. Project Variable
Expenses. These change from month to month.
They might include things like gas, takeout dinners and clothing purchases. Credit
card payments tend to also fall into this category. Look at your average over the
two previous months for a ballpark, but always err on the high side when it comes
to budgeting for them.
6. Include Occasional
Expenses. Some expenses only come up from
time to time. They can be predictable (like your summer vacation) or unpredictable
(like a car repair). Either way, it’s important to budget for expected and
unexpected occasional expenses. To do this, take the total estimated cost, divide
by 12, and include that amount into your monthly budget.
7. Emergency Fund
Savings. Aim to set aside at least 3-6 months’
worth of expenses in a highly-liquid savings vehicle like an FDIC-insured bank account
(some advisors suggest 12 months depending on whether you own a home, are
married or have children). Clearly, this can take time to build up, so if you
don’t yet have enough saved for a rainy day, budget regular contributions to an
8. Retirement Savings. Sit down with your financial advisor, who can help you determine
how much you’ll need to save in your 401(k) and other retirement accounts each month
to stay on track to achieve your retirement goals. It’s important to “pay yourself
first” when it comes to funding your future — and your budget should reflect this
9. Plan for Windfalls. Decide ahead of time what you’ll do with an increase in pay, tax
refund, gift, bonus or other found money. Having a plan reduces the likelihood of
an impulse buy. Consider using most of it to bolster your retirement fund or pay
10. Monitor and
Periodically Re-evaluate. It’s important to reexamine your
budget regularly and whenever your financial circumstances change. Depending on
your situation, that could be quarterly, semi-annually or annually.
Don’t be hard on
yourself if it’s difficult to stick to your budget each and every month. You may
need to make some adjustments from time to time. The most important thing is to
keep trying to meet your spending and saving targets. If you need help determining
a realistic budget for your situation, make an appointment with a financial advisor
who can assist you.