Anyone can create a budget, but the key to successful budgeting is creating a budget you can stick to. Your budget will help you designate portions of your income to specific tasks or categories to help you reach your financial goals, but you will only reach those goals if you are able to stay within the spending limits in your budget. There are three main steps to complete to create a budget you can stick to. Here is how to complete those steps.
Step One – Identify Spending Trends
The first step in creating a successful budgeting plan is to identify trends in your spending. This allows you to determine where your money is going and whether it is being put to the best use for your financial security. People that have never budgeted before often find that they are wasting a lot more in frivolous spending than they thought and are able to adjust their spending to more reasonable limits once they see the limits in writing on their budget.
The best way to identify trends in your spending is to track your spending for two months and categorize your transactions into spending categories, like home, transportation, utilities, groceries, and so on. This can be tedious to do by hand and there are several companies online that will do this task for you if you provide them with your transaction information. One of the best is the free application available at www.Mint.com, which takes all of the new transactions from your bank accounts and automatically sorts them into spending categories with running totals so you can see how much you are spending throughout the month.
Step Two – Establish Financial Goals
After you have established where your money is going now, it is time to figure out where you would like your money to be going in the future. Establishing financial goals gives you a reason to save more and encourages you along on the path to increasing your net worth. Great goals to aim for include creating an emergency fund, saving for a vacation, saving for a down payment for a car or home, or saving for retirement. Once you have decided on a couple of goals to reach for, it is time for the third and final step.
Step Three – Assign Amounts To Your Spending And Saving Categories
Create your final budget by assigning varying amounts of your after-tax income to the various spending and saving categories you established in the first two steps. The goal is to keep your spending below 90 percent of your income and your savings above 10 percent of your income. It is important to leave some flexibility in the budget to account for weeks where spending in one category is heavier than in other weeks and for minor unexpected expenses that arise. At the end of the day, you will have a budget that can guide your spending and help increase your financial stability for the future.
Join our newsletter
Subscribe to get the latest "Engineer Your Finances" content via email.