Monthly Newsletter: January 2011
5 Steps to Building a Budget That Works
Now that the holidays are over, you may find yourself thinking about ways to improve your personal finances. Maybe you’re thinking about paying down debts or creating savings. To do these things, you’ll need a budget. If you’ve tried budgeting and stopped after a few months you’re not alone. Here are a few tips to help you create a budget that you will follow this year.
Step 1 " Set a Goal
To maintain a budget, you’ll need to set a financial goal. This means you’ll need a goal that is measureable and that you’re working towards each month. Let’s go through a few examples. Suppose you say, "I need to create a budget to find out how much I’m spending. While it’s part of the budgeting process, it doesn’t help you set a goal. The problem with the statement is that it’s vague—it doesn’t establish specific dates, deadlines, or dollar amounts.
Instead, be more specific about your goals: "By May 1, 2011, I will save $1000 towards a family emergency fund. Or maybe you’re planning a family vacation this summer, "By July 15, 2011 I will save $1500 towards our family vacation. Once you’ve set a goal and established a date and dollar amount to accomplish the goal, you’ll find yourself moving towards the goal.
Step 2 " Create a Spending Plan
Next, you’ll need to create a spending plan. Creating a spending plan is simply recording what you make, what you spend, and what you plan to spend. When you decide to start a spending plan, the first thing you’ll need to do is write it down. If you like using the computer, you might consider using an onlinebudgeting spreadsheet provided by Trinity or an online personal finance website such as Mint orBundle. Or you may prefer to create a spending plan using a worksheet, such as those in the back of Trinity’s budgeting books, or write everything down on a piece of paper. The goal is to find a method—computer, worksheet, or a piece of paper— that works best for you.
Step 3 " What’s your income?
While creating a spending plan, you’ll need to evaluate your income. Income can be divided into two categories: gross—total income before deductions— and net income—income after deductions.
For example, from your gross income are deductions such as federal taxes, Social Security, state and local taxes, health insurance or investments. What’s left after deductions is net income. What you net is usually 30 percent less than you gross. All decisions regarding your financial goals should reflect net income.
Step 4 " Where is your money going?
Now that you know what’s coming in every month, it’s time to see what’s going out. Here’s where you begin to categorize expenses—meaning you find out how much you’re spending on such things as housing, groceries, entertainment, clothing, or gasoline. These expenses will either be fixed expenses—the same amount each month—or variable expenses—expenses that change each month.
Once fixed and variable expenses are written down, you’ll need to determine how much you spend randomly—you’ll need to track your expenses. Tracking expenses means recording how much you spend every day. To track your expenses you’ve got to write it down.
The simplest way to track expenses is to use a notebook and write down the date and dollar amount of how much you spend. Or you can use an online tracking expenses spreadsheet provided by Trinity. For example, "On January 11, spent $34.50 on gas and coffee After tracking for several weeks, review the total amount. How much are you spending randomly on cash expenses? In the end, you’ll need to cut cash expenses to reach your financial goals.
Step 5 " Evaluate your Plan
Once you’ve determined your fixed and variable expenses and tracked your spending, you’re ready to start reallocating money to reach your financial goals.
For example, if you’ve decided to save $1000 within the next 5 months that means putting aside a specific dollar amount every month. Where will that money come from? You’ll need to review your spending plan to determine where you can cut expenses to reallocate money towards your financial goals.
If you’re spending $600 a month on groceries you might try to spend $500 next month and apply the $100 savings to your goal. If you’re spending $75 eating lunch out at work every month, you need to bring lunch from home and reducing that amount next month. If you’re paying for premium cable channels, you could try going without them until you reach your goals.
As you go through your list of expenses looking for places to cut, focus on such things as random cash expenses or other expenses that you can reduce to reach your financial goals. For example, if you love books, you don’t have to go to buy them at the book store " the library has them for free. If you enjoy dining out with your spouse every Friday, cut the cost by only going once a month. If you enjoy clothes, buy a few items a month rather than a few items a week.
In short, a spending plan will help you eliminate wasteful spending and reach your financial goals.
Conclusion—Moving Forward in 2011
Following the 5 Steps to Budgeting involves taking time to work through your personal finances and look closely at your spending habits. If you’ll create a budget and track your spending, you’ll begin to rebuild your financial future and reach your personal finance goals this year. If you have questions regarding budgeting, contact Trinity 800.758.3844 and speak with a counselor today.
For more information regarding budgeting, seeBankrate.com or Kiplinger Personal Finance Magazine.