MLR

Five Easy Steps to Creating Your Budget

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By Stuart Vick Smith, ML&R Wealth Management

Building a budget is a task most of us dread. In order to build up your savings, you need to be accountable for your spending. Family finances can be overwhelming, but the math is simple- to build savings to accomplish short and long term goals, we need to spend less than we make.

Every January, I sit down with my husband to put together our budget for the year. We think about our savings goals and how much we want to set aside for short-term ‘wants’ like travel and household updates and long-term ‘goals’ like retirement. It is always a struggle to make the time and put forth the energy, but we come away with a plan that puts our mind at ease and sets us in the right direction for the year.

Creating a budget takes some work, but the long-term rewards make it worth the effort. Below are five easy steps to get your budget in place.

Review your spending
The easiest place to start your budget is with what you already know. Look at the last six months of spending to determine where your money goes. Create a schedule listing all major spending categories- from housing, healthcare and clothing to food, car and travel. Make sure to look at all sources of cash flow- checking account and credit cards data- so you don’t miss anything.

Break down into discretionary and non-discretionary spending
Separate must-have spending, like mortgage, health insurance and food, from optional items such as entertainment, recreation and travel. The non-discretionary spending items may be harder to adjust, but if needed, you can take a hard look at these items throughout the year. In the non-discretionary category, remember to include some money for unplanned but necessary expenses, like home and auto repairs. For the discretionary, see if there are easy places to reduce spending. This may include items like travel, food and entertainment and gifts.

Include a line for savings
Instead of seeing what you have left over at the end of each month, be proactive and set up a line item for savings. Target 10% of your income as a savings goal, before you have the chance to spend it. Make saving easy and have it moved to your retirement or savings account at the beginning of each month. Build in amounts for short and long term savings goals and make it a permanent part of your budget.

Reduce unnecessary spending
Once you have logged all your past expenses, you can start looking for opportunities to cut back. Are your discretionary items representing a large portion of your monthly spending? See if you can reduce or eliminate daily coffee runs, eating out instead of cooking in, gym or other memberships that may go unused. The little items can add up to big dollars, which can give you more to allocate towards savings each month.

Track, review and adjust
Making the budget is the first big step, but it is not the end of your work. Make sure to track and review your spending on a regular basis. Update as you go or you won’t stay focused. Things do change over time, so make adjustments as needed, but try to be disciplined and stay true to your goals.

Budgeting can be a painful process, but it creates discipline and accountability. Set up a time each year, as I do with my husband, so you make this part of your annual routine. Making sure you stay true to your plan will give you the opportunity to build your savings and see your goals become reality. If you take the time to build a budget, reduce unnecessary spending and commit to savings, you will get through the year financially ahead and you will be proud of all that you have accomplished.