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Do you have a personal budget to keep track of spending, saving and all of your financial goals in between? You might consider starting one. A budget is one of the best steps you could take toward your goals.
Sticking to a budget is where some people struggle, but this doesn't have to be the case! You could increase your overall financial success by creating a detailed personal budget that also includes strategies to maintain it over time. Consider asking yourself these five questions that could help you manage, maintain, and master your budget.
1. Where Are You Today?
To start, confirm what you're currently working with financially. A firm understanding of your net income could help. Net income is the money that hits your checking account from your paycheck or other earnings after taxes and other withholdings, including health insurance payments and retirement account contributions.
It could also help to be aware of your current living expenses and spending habits. Consider spending time one month tracking every purchase and bill that you pay. You could do this with a personal budget app on your smartphone or with a personal budget spreadsheet on your computer. Taking a step back to examine your spending could help give you a better understanding of where you are today and where you could go tomorrow.
You could start organizing your budget once you understand where your money is going. You might consider something like the 50/20/30 rule, which suggests sorting your spending into three main categories by percentage:
- Essentials & Fixed Expenses (50%): Your mortgage or rent, utilities, groceries, etc.
- Financial Goals (20%): Your savings, investments, debt repayment, etc.
- Flexible Spending (30%): Any discretionary spending — or your "wants" — like travel, hobbies, entertainment, etc.
2. Does Your Spending Support Your Goals?
Once you know how much you're spending in each category, you could consider whether your spending is reasonable. The 50/20/30 rule is just one of the many budgeting strategies available and depending on your own specific goals, there might be a different strategy that works best for you.
If your goal is to buy a house, for example, you might consider increasing your savings and reducing the amount you spend on "wants" every month. You might also consider looking at ways to save money on your fixed expenses. If you rent a large apartment, for instance, you could consider moving into a smaller (and cheaper) place as you work to save enough to buy the home of your dreams.
After you have examined your monthly spending habits, consider checking the total against your net monthly income. If you are spending more than you actually make, consider cutting costs and eliminating expenses so that you could live within your means while working toward your financial goals.
3. Is Saving & Investing a Priority?
Some people just save or invest whatever happens to be left in their personal budget at the end of the month. And depending on their spending habits, that might mean not saving anything at all! Financially successful people rarely leave that success up to chance. So, think about treating your financial goals like your bills, which you know you have to pay.
Next, consider your goals and think about how much they'll cost. For example, if you want to take a tropical vacation, you could do some research and come up with a total cost for your trip. Let's say you plan on spending $3,000 on a luxury trip to the Caribbean. Think about your timeline. If you decide to head out a year from now, you'll have 12 months to save the money you need to fund your trip ($250 per month).
Consider putting that $250 into your budget as a line item or bill you pay to yourself — you could even set up an automatic contribution from your checking account to your savings account each month. You could do this with other savings goals or investments you want to prioritize.
4. How Do You Track Your Spending?
Depending on how complicated your finances are, you could have many transactions on your debit and credit card every month. Keeping track of these transactions is an important part of managing your spending — but doing it manually could get overwhelming fast.
Luckily, there are many resources available to help. If you have a smartphone, some budgeting apps directly import all of your transactions — so you don't have to do the detailed work of keeping track of everything individually. Some will even create graphs and charts to show your progress visually and will send you alerts when you get too close to a spending limit for a particular category.
Tracking your spending could help give you a better idea of how much money you have left to spend in each category. For example, let's say you have a $400 budget for groceries and have already spent $300 halfway through the month. If you're keeping track of your spending, you'll know that you might want to spend more sparingly in that category for the rest of the month.
5. Do You Re-Evaluate Your Budget Monthly?
At the end of every month, consider going through your personal finance budget to see how you did. Note the areas where you did well — and be mindful of places where you overspent in the future. By evaluating what happened, you could become more proactive about your spending.
Holding yourself accountable and being honest could go a long way in helping you get a real sense of your spending habits so that you could change course if needed. Additionally, your income, expenses and priorities will likely change over time, so setting up your budget to adapt to changes could help support, rather than disrupt, your financial goals.