A budget is more than a way to manage daily expenses, it’s a tool for reaching your financial goals.

There is a financial axiom when money is available – in any amount – it is expendable. The more money people have available, the more money they’ll spend – often without being aware of it.

Access to credit cards can actually increase spending up to 83% versus paying actual cash.

Budgets aren’t just for people with limited incomes. They’re for building responsible spending habits that contribute to a positive financial future.

The more money you make, the more you have to manage.

Why Budget?

Financial experts have always recommended creating a budget. What’s prompting your interest in following that advice now? It’s helpful to take a minute and consider what you expect to learn from the process.

In many households, one spouse managed the day to day finances. The other often has no idea of the day-to-day expenses and bills. In that environment, it’s not unusual for them to argue about money

A budget provides the data to reduce the tension in those discussions. With a budget, there’s no more mystery in the family finances and both spouses can start on the same page.

Expectations for Your Budget

The objectives for the budget process aren’t always about spending or spending in excess. A budget is a planning tool that helps families prepare for life-altering events.

Eldercare or pregnancy, for example would require a change in your financial plan. A job loss, even with a severance plan, means a fix is o. An economic downturn can raise concerns about investments and retirement funds.

What do you want to know?

  • How much is our cost of living (housing, utilities, food, etc.)?
  • What are we spending our money on?
  • How much are we saving?
  • Where can we cut expenses?
  • How do we reduce our debt?
  • Can we afford a vacation home?
  • Can we afford college tuition?
  • When can we retire?

Budgets don’t need to be stingy or punitive, but they needn’t be a free-for-all either. When you start a budget, you’re saying you want to focus on what’s truly important for your family.

Financial Goals

If you haven’t yet set goals for your finances, this is a good time. Financial goals are often the catalyst for starting a budget.

Immediate Needs (Short-Term Goals)

Your living expenses are short term goals, so is reducing debt. A budget illuminates ways to cut expenses. The money you save will pay off credit card debt and loans.

Short term goals are your necessities When your income is stable, they are little more than bills. Losing a job will raise their priority. You may end up adding debt instead of reducing it. Your budget will get you back on track when your situation improves.

Family Priorities (Mid-Term Goals)

These goals balance your responsibilities with your wish list. They might include purchasing life insurance or starting a college fund. You might focus on paying off your student loans or improving your credit score.

This is also when you fund your wish list – a cruise to Tahiti, starting a bed and breakfast or buying a vacation home. A budget should help you direct your money toward the things you dream about.

Quality of Life Goals (Long-Term Goals)

Planning for your retirement is the objective here. Some calculators help you decide how much money you need for your retirement. Don’t forget to factor in costs for long term care in the event of a catastrophic health event.

Add in anything on your bucket list – trips, vehicles, hobbies. Enjoying your retirement is part of the plan.

A budget helps you stay on top of your immediate needs. But it’s most important aspect is visibility. A good budget illuminates the variance between spending habits and financial goals.

In other words, your budget lets you maintain your lifestyle for your whole life.

How to make a monthly budget?

Creating a budget can feel overwhelming. That’s especially true if you have multiple sources of income, or a complicated debt structure. If you’re under financial stress, it can feel even worse. But avoidance is not a solution. A budget can be.

Here are two common methods for budgeting.

Zero Sum Budgets

The Zero Sum budget is a method developed by financial adviser Dave Ramsey. This method allocates every dollar for a specific purpose. If your budget is effective, you’d have zero dollars left over at the end of a month.

This budget requires rigorous planning to categorize expenses. It requires commitment and is very effective for studious money managers.

Budget your money using the 50/30/20 rule

The 50/30/20 budget method is more flexible and can allow for tweaks. The 50% of your budget addresses the cost of living necessities – the immediate needs. The 30% applies to things you want – discretionary purchases. The final 20% goes into savings.

You can tweak the percentages to better meet your circumstances. For example, 50% of your income for living expenses may be high. You could divert 10% to a savings account for that bed and breakfast you want to start someday.

If you are learning to budget, we encourage you to use the 50/30/20 budget as a starting point. It is easier to adjust and easier for the family to follow.

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Budget Plan Sample

This is an example of an 8 step plan to build your budget:

1. Choose a Budget Worksheet

There are many free templates you can use to set up your budget. They come in print or digital formats.

You can export your bank statements to personal financial software. If you prefer, export them as CSV files that open in a spreadsheet. Even if you prefer to use paper, this will save you a lot of time.

2.  Look at what you’re spending

Identify the amount spent on immediate needs first, so you can take them out of the mix for a minute. These are your cost of living expenses – housing, transportation, utilities and food.

Everything left is a discretionary purchase. The lattes, restaurant lunches, shoes, clothes, tickets, trips – these are spending choices. Choices that are changeable.

Next check seasonal or holiday spending. Christmas and Hanukkah are the obvious splurge centers. But don’t forget to look at other annual events, like birthdays or vacations or holiday travel. Seasonal spending is another place to trim.

3.   Look at what you’re earning

When you have a salaried job, pull your take-home pay. Do the same for your spouse if both parties work outside the home.

Next, consider any additional sources of income you have. These could include child support, alimony, disability, annuity payments or pension benefits

The objective is to compare what’s coming in with what’s going out. Document how much you’re bringing in per month.

4.   How much are you saving?

How much is in your savings account? Have you set up an emergency fund in case of a financial emergency?

Do you have alternatives if you need them – certificates of deposit or bonds?

Are you considering your financial goals? It’s a good idea to be as specific as possible when looking ahead:

  • Save 25,000 for a down payment on a vacation home
  • Save 10,000 for our 25th anniversary cruise
  • Put 5000 a year in my daughter’s college fund

The more money you have, the more money you can divert to savings. But if you don’t set goals, savings end up taking a back seat.

5.   Trim the fat

Once you have the numbers, plug them into your worksheet. The family’s spending habits will become clear. This gives you the option to look at discretionary expenditures.

Here are some places to look for trimming back costs.

Credit Cards

  • Reduce the number of cards you carry. Five cards total is plenty including one set aside for emergencies.
  • Always check cards, rates and benefits to see if better options are available.
  • Stop using store cards which have the highest interest rates.
  • Check the credit limit on your cards and reduce it down. The more credit you have, the more you can spend.
  • See if you can consolidate the debt on a low-interest card or a personal loan

Discretionary Choices

  • Cancel any memberships that aren’t used (think gyms.)
  • Cut back on cable or the number of streaming services.
  • Eliminate nice to have services – car detailing vs car wash.
  • Make your own lunch/coffee at least 3 times a week.
  • When possible, repair don’t replace.
  • Upgrade cell phones every two years.

Seasonal Choices

  • Cut back on holiday gift-giving by 50%
  • Stop buying more holiday decorations, lights, etc.
  • Book travel early enough to avoid higher prices

Immediate Needs

  • Compare cell phone plans for a better plan and stop upgrading phones.
  • See if you qualify for a lower mortgage rate
  • Automate thermostats to reduce heating and cooling costs
  • Set up automatic bill payments

6.   Talk with the family

Unless you live alone, family buy-in is the key to a successful budget. We recommend you hold a family meeting to talk about the plan.

Make sure you and your spouse are on the same page. Chances are good there will be some push back. When you present the idea of cutting back on spending, try to personalize their benefit. For example,” if we make some changes, we pay more of your college tuition.”

Explain what you intended to do but try to maintain a dialogue. Your kids might be more willing to give up one thing over another. If there’s no financial downside, let them decide.

Use budgeting apps like PocketGuard or Mint to track spending. Involve your kids in choosing which one to use.

The Greenlight app teaches money management for teens, including spending and earning. It could offer a way to bring your kids on board.

7.   Monitor the plan

This is a big change for everyone, so don’t expect perfection out of the gate. Chances are good everyone – including you – will make mistakes.

The message here is to pay attention. Check on spending and keep an eye out for old habits. Using an app will help with that.

We’d suggest you and your spouse look over the budget on a regular basis. If there are consistent issues, discuss how to address them. Always praise in public and correct in private.

Consider a rewards program to encourage new behavior. Always stay positive and provide regular updates on the progress.

8.   Persevere – Keep up the good work

A budget is the first step in building a stronger financial future. To be successful, the family has to live with it. Your budget needs to be workable. The expectations need to be realistic and the outcomes attainable.

If some of your original ideas are too stringent or too extravagant, adjust them. We’re not suggesting you give in when things are hard, but it’s okay to tweak.

The best budget model involves both spouses, working toward the same financial goals. Working together tends to keep everyone on track.

Budget Tips

There’s no question that living on a budget is a big change. For more affluent families, curtailing spending can be more of a challenge.

Make your plan, trim the fat, monitor your spending and tweak if needed. That’s how a successful budget happens.

Here are some key points:

  • People spend more with credit cards than they do with cash.
  • Use your budget to support financial goals that go beyond the day-to-day.
  • Five credit cards are plenty, with one set aside for emergencies.
  • Using a credit card is a privilege. Not everyone needs to have one.
  • The 50/30/20 budget rule is a good method for beginners.
  • Look at what you’re spending, earning and saving.
  • Find places to trim the fat.
  • Hold family meetings to communicate the plan.
  • Expect mistakes but keep things on track.
  • If you are running in the negative – spending more than you earn – you may need to take drastic action.

In Closing

Remember, a budget is a tool to manage money. They’re helpful for people of all incomes. The more money you have, the more money you need to manage.

You created a budget to find answers. Once you have them, act on them. If all you do with your budget is reduce spending, you’re missing a key piece of the puzzle.

Budgets are the path to reaching your financial goals. A good budget protects your lifestyle for the long term.

If your spending habits are consuming too much of your income, you can learn how to budget. If you have dreams and responsibilities, learn how to budget for them. The best way to protect your retirement. Learn how to budget your money now.

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