It’s a brand new year, and you’ve decided to tackle your finances. Don’t know where to start?
Like most Americans, you probably want to save more money and erase debt. A good first step, then, is to take a closer look at your finances.
Ask yourself this question: Do I spend more money than I make? If you’re not sure, then it’s time to create a budget.
Let’s start with the basics.
What’s a budget?
A budget is a financial plan. It’s an estimate or a projection. A budget lets you know where you stand financially.
With a budget, you’ll have a better understanding of what you spend, how often you spend, and on what you spend. You’ll also have a clearer picture of where you stand month to month.
Why is having a budget important?
A budget can help you set—and hopefully reach—your financial goals. Once you know how much money you have compared to how much you spend, you can set some personal goals. Maybe you’ve always wanted to travel to Ireland. Maybe you need a second car. Or, like others, you want to build up that emergency fund.
A budget allows you to do the things you want. It gives you options. And with options comes financial freedom.
How should I use my budget?
Use your budget to track your expenses. Expenses might include housing costs (utilities, rent/mortgage), Internet, phone, food, transportation (public and private), pets (food, vet bills), health care, school (books, tuition), entertainment, clothes/shoes, child care, child support, and insurance (health, car). Other expenses might include magazine or software subscriptions, or any online recurring payments. Remember to include extracurriculars like dance classes for your kids or sports (fees, uniforms).
The best way to track every expense is to save your receipts for every transaction over a three-month period. Keep all your receipts in a drawer. Pull those receipts and compare them to the items in your budget, and adjust as needed.
Review your budget periodically to see where you’re spending the most money. For example, let’s say a large percentage of your income is spent dining out. You really enjoy dining out, but cutting back two nights a week wouldn’t hurt. The little extra you save could go toward bigger student loan payments. And, hey, paying off your student loan just happens to be one of your top financial goals for the year!
It’s also important to revisit your budget after you get a new job, move to a new location, or have a new family member in your household.
What documents do I need to create a budget?
Once you’ve gathered your paystubs, bills, and receipts, you’re ready to create your budget.
How do I create my budget?
Gone are the days of paper-and-pencil budgets. Though, if you prefer to write out a budget yourself, and you don’t mind doing the math, that’s perfectly acceptable. Just know that you have more options.
Sitting in front of a computer? A simple Google search for “free budget template” will yield hundreds of results. Many people prefer an Excel spreadsheet for their budget because the sheet is formatted, the formulas are built into the spreadsheet, and the income and expense calculations are automatic. Just type in your information, and voila!
If you’re more digitally savvy, and prefer your mobile device, you can choose from a number of personal finance apps that help you track your spending. With their vibrant color schemes and user-friendly designs, these apps sync up to your bank accounts to gauge your spending habits and help you reach your savings goals.
That’s it! All the tools are at your fingertips. No financial advisor or expertise needed.
Tip: Remember to include your tax refund as part of your income. Not sure how much money you’ll get? Use our free refund estimator as a guide. Then, plug that number into your new budget.