Many people wouldn't set out on a road trip without a plan and a map. Likewise, you can't expect to reach your financial goals without developing a plan for spending and saving.
This is why the first step in creating a budget would be to identify where your money is going. Knowing where you spend your money will help you make educated decisions on how to better manage it. Here are five simple ways to help you to keep better track of your spending.
Step 1: Divide your budget into basic categories
Begin by making a list of specific spending categories. For example: Housing, food, auto, entertainment, savings, clothing, medical, etc. You could also organize your expenses into needs - such as your car loan and electricity - and wants - such as vacations, hobbies, and entertainment. It might look something like this:
Home (mortgage, upkeep, insurance)
Auto (loan, maintenance, insurance)
Food (groceries, restaurant purchases)
Utilities (Gas, electric, water)
Health and fitness (medical, gym membership, grooming)
Travel and vacation
Personal (entertainment, shopping, clothes)
Step 2: Know what to budget for each category
For example, in your housing category, you might list $800/month for rent, $25/month for renter's insurance, $125/month for utilities, and so on. Add them up for a total housing budget of $950.00 per month. If you don't know the exact amounts you spend, try and make close estimates.
Step 3: Know how much you have to spend
Once you know what your regular expenses are, compare them with your paycheck amount. Are you ahead or coming up with a negative number? If you're in the red, go back to your monthly expenses and see if you can identify areas you can cut back on. If you're coming out ahead, take the extra money and allocate it to one or more of the following three group funds: Your flex money or emergency fund (readily available cash for unexpected needs - not wants), your savings fund (money that you put away for the future and try not to touch), and spending money fund (entertainment, eating out, etc.).
Step 4: Make Adjustments
If the bottom line of your budget proved that you are overspending your monthly income, you will come to the most difficult step - making cuts to your monthly expenses. There are many resources that can teach you to be smarter with the income you have, help you cut your recurring monthly expenses, and establish your financial boundaries for personal budget planning. Learn more about some of the best online money-management tools by trying out a few of the recommendations by Kiplinger.
Step 5: Keep a journal
When you're just starting out with a new budget, it can be overwhelming to estimate how much you'll need. For the first few months, try keeping a weekly journal or list of your spending habits. You might be surprised to discover how much that morning latte is costing you at the end of each month.
Tracking your spending should only take you about an hour or so a week. Once you have an established budget, you will want to keep it in check. The discipline, and the knowledge that you're making good long-term and short-term financial choices, will provide you with a great deal of peace of mind, and will take you away from having to live paycheck to paycheck each month.
*Content provided by Protective Life