How to set up a budget, part 2: Understand where you want to be
Published by: LifeWorks,
In this second part of a three-part series, we take a look at how you can take charge of your finances by understanding where you want to be with your money – long-term and short-term – to set up a budget. For more information on how to start setting up a budget and understanding where you are now, see our first post of the series here.
Understanding where you want to be with your money
Once you find out where you are with your money and create your first monthly budget, begin to use it regularly. Not only to get a good feel for how it can keep your finances on track but also take the next step: Understand where you’d like to be and map out your budget for six months to a year down the road.
By doing this you can easily forecast which months your finances may be tight and which ones you’ll have extra money.
Depending on what you found out when you went through your monthly budget, you probably will want to focus on one of three initial goals:
- Save money for the important things. If you have money left over at the end of each month, you’ll want to track your savings and try to increase the amount you put away toward financial goals like starting your own business, buying your first home, or your retirement fund.
- Reduce or eliminate debt. If you have money left over at the end of the month, consider how you might pay debt down using these resources. The more you put toward your debt, the faster you can pay your debt off for good.
How to manage your debt?
- Know who and how much you owe
- Pay your bills on time each month
- Make at least the minimum payment
- Decide which debts to pay off first
- Pay off collections and charge-offs
- Create a small emergency fund to fall back on
- Request a credit card rate reduction
- Stop deficit spending. If you end up in the red at the end of the month, you may need to cut expenses and/or increase income to have enough left to save or pay off debt.
To start looking at how you can work out your short-term adjustments, add one more column to your budget worksheet – whether you’re writing it down on paper or using an online app – and set a budget for the year to come by predicting how much you’ll need for each expense.
Factor in any increase you expect — a raise at work, a rent increase, or higher property tax rates. And look at where you might trim your expenses. You might:
- Reduce entertainment expenses. Cancel magazine subscriptions or club memberships, and look for inexpensive entertaining things to do.
- Save money on food. Use money-saving coupons when grocery shopping, buy store brands, and/or buy in bulk.
- Cook and pack your own meals at home. Bring your lunches to work/school and reduce eating out or getting takeout.
- Save money on transportation. Carpool, ride a bike, or use public transportation. Find ways to reduce travel expenses for big trips by using travel budget sites like TripAdvisor.
- Drop premium cable channels. Downgrade from premium to basic cable by watching freeview channels or getting a subscription for online services like Netflix
- Cut down on energy bills. Set the thermostat three degrees cooler during the winter and air seal your home. Unplug all unused electrical devices.
- Switch to a less expensive phone plan. Even if you do use it a lot, look at the features you’re paying for on your bill and see if you can trim any of those.
Good to know
Go for small expense reductions in multiple areas rather than cutting things out completely — “all or nothing” planning is unrealistic and a set-up for failure. Every small success can lead to another success. For every dollar cut, plan to channel that dollar into repaying debts or adding to savings.
Next step? Think about the “big picture”. How would you like your money to work for you, now and in the future?
- Do you hope to retire with a comfortable retirement income?
- Would you like to have savings to cover your expenses for a few months if you ever lose your job or choose to take a sabbatical?
- Do you want to buy your own home, move to a bigger house or apartment or even to a different country?
- Do you want to travel and explore the world for a few months?
- Set aside money for your child’s education?
- Do you simply want to get out of a cycle of ever-increasing debt?
Test those goals by asking yourself whether you’re prepared to do whatever it takes to reach them. If you’re not, they aren’t your most important goals. Pare the list down to the goals that you’d make financial sacrifices to reach.
What is your overarching desire for your family?
If you share financial responsibilities with another person or more, talk about the future together and consider the really big picture!
- Find out where you agree and disagree.
- Talk about your saving and spending patterns and whether you all agree that your choices are helping you reach your most important goals.
- Aim to come to some agreement about priorities and spending. This may take time, but it’s time well spent. A shared budget needs to reflect shared goals in order to succeed.
Test, test, test!
Now that you are gaining more awareness of your budget and money, it’s time to test your goals. If you aren’t making progress toward a particular goal, ask yourself whether it is still important and relevant. And if some people in the household are having trouble staying on track, you need to review your goals together as a group. Remember, once you set your goals the way to achieve them is through small steps.