Establishing a Budget

Do you ever wonder where your money goes each month? Does it seem like your paycheck gets eaten up by taxes, deductions, and living expenses? Ever feel like you run out of paycheck before the week is out? Does it seem like you’re never able to get ahead?

Well, you’re not alone. Many people have trouble managing their money from time to time. But budgeting your money doesn’t require unreasonable sacrifices, and it doesn’t take an advanced degree in accounting or economics to do it. Instead, it calls for mindful spending and sensible habits.

Step 1: What are your financial goals?
Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child’s college education, retirement). This will help you set priorities. For example, if one of your long-term goals is to pay for your kids’ college education, you may need to postpone your short-term goal of buying a brand new car for a while. Armed with a clear picture of your prioritized goals, you can work toward establishing a budget that can help you reach them.

Step 2: What are you spending your money on now?
Before you can create a smart budget, you need to know how you’re currently spending your money. You can get some of this information from your checkbook, credit card statements, and other receipts. You should also keep track of your cash expenditures for a couple of weeks—the $3 cappuccino, the $4 magazine, the $6 fast-food lunch. These small cash outlays may not seem like much, but over the course of a year can add up to hundreds of dollars leaking out of your wallet.

Once you have that information, divide your spending into two categories: fixed expenses, such as housing, transportation, food, and clothing, and discretionary expenses like entertainment, hobbies, and vacations. Don’t forget to include out-of-pattern expenses like holiday gifts, car maintenance, and home repairs. You may be surprised to see how much and where you’re spending your money.

Step 3: Where can you cut costs?
Identify categories where your expenses are high and think about ways to cut back. Maybe you could bring a sandwich to work instead of going out for lunch, at least some of the time. Instead of dinner out and a movie, stay in and rent a video. Engage the rest of the family in brainstorming ideas—you’re all in this together. Start with cutbacks that are relatively painless. Small changes can mean big savings, and could free up some money for your long-term goals.

Step 4: What habits can you change?
You may find that some of your spending involves habits that you can easily change. For example, you can try to avoid impulse purchases. Wait a week or a month, and see if you still really want or need it. Paying off your credit cards every month can save you a substantial amount of money in interest charges. Making modest adjustments in your day-to-day spending habits will go a long way toward helping you get on track to reach your financial goals.

Step 5: Remember your goals
When you’re putting together your budget, don’t forget to include a category for the financial goals you identified in the first step. You can use some of the freed-up money you identified in Steps 2-4 to start or add to a college savings plan or retirement program. Does your employer offer a contributory retirement program? If you’re not already enrolled, join and start contributing as soon as you can, even if you start with a modest amount. If you’re already contributing to the program, think about increasing your contribution on a regular basis. Take advantage of any other employer-sponsored programs you have that offer payroll deduction, like life insurance, auto or homeowner’s insurance, for example. Payroll deduction is a good way to discipline your saving and spending habits—it’s easy, automatic, and if you don’t see it, you won’t spend it on something else. Getting into the habit of setting something aside for retirement on a regular basis is critical to your future financial security. Make sure that you make your future a priority.

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