Tracking Your Spending
To begin the process of creating a budget, you need to understand how much and where you spend your money. Begin by tracking all your spending, including cash purchases, debit or credit card purchases, bills paid by check, etc. Using a notebook to write down every item and how much you spend is an easy way to start keeping track of your finances. Then, you can organize your expenses into seven categories.
|HOUSING||rent, mortgage, insurance, utilities, taxes, internet/cable/phone|
|FOOD||groceries, household supplies, dining out, take out, snacks|
|TRANSPORTATION||gas, parking/tolls, bus/taxi fare, insurance, car loan, car maintenance|
|HEALTH||medicine, insurance including copays, glasses, dental, braces|
|PERSONAL/FAMILY||child care, child support, allowances, clothing/shoes, laundry, donations, entertainment, personal care, school supplies|
|FINANCE||credit cards, personal loans, savings|
|OTHER||prepaid cards, phone cards|
Need vs. Want
The next step is to determine if you are spending money on something you need or something you want. A need is something that you must have in order to live, for example, housing, electricity, food, etc. A want is something that you can physically live without but that you would like to have, such as going to the movies, getting your nails done, etc. When creating a budget, you must account for your needs before your wants. Make sure your priorities for food, shelter, health care, etc. are taken care of first. If you have extra money in your budget, it is not a bad thing to allow yourself to splurge a little, but only if you have covered the necessities.
A budget is a useful tool when money is tight and helps to ensure you are not living beyond your means. Once you have all your expenses sorted into categories and marked as a need or a want, it’s time to start creating your budget. Working with a budget, you can begin to cut back on unnecessary items in order to set aside savings in case of an emergency. After tracking your spending, you may discover that you spend more on the vending machines at work then you do on groceries. It might be wise to include snacks/drinks into your grocery budget, where you can buy these items at lower prices, rather than spending money on the markup from the machines.
If you are living in a family situation, it is important to include all members of your family in the discussion when creating a budget. That way, everyone’s needs are accounted for and everyone can learn the importance of sticking to a budget. If everyone in the household does not stick to the budget, you will be back at square one in trying to organize your finances. If you have children, this may be difficult for them to understand, but teaching your children about money and budgets at an early age will help set them up for financial success in the future.
A Balancing Act
We have already looked at the spending habits that will account for the “Expense” side of the budget, but we also need to consider the “Income” side to make sure we know how much money we have coming into the household and where that money comes from. For income, you should track paychecks from your job, child support, alimony, social security/disability payments and any other money that you receive regularly. It’s very hard to prepare a workable budget without a consistent source of income.
Once you have determined your income and expenses, review everything to make sure that your income will adequately cover all of your needs and expenses. If the end result is close or not enough, this is the time to really review your expenses to make sure they are in fact needs and to see if there is anywhere you can cut back. For example, if your grocery expenses are high, think about shopping somewhere with lower prices, switching to generic options, or utilizing coupons to reduce your grocery allowance. If your heating cost is high, you may qualify for local, state or federal assistance programs. Your insurance broker may have options to “bundle” a deal between your home/car/life insurance.
The goal is to look for areas where you can lower your expenses so that your income will cover all your needs. If there’s income available after your budgeted needs, assign that money to savings, paying more on outstanding debts, and/or treating yourself by allotting money for your wants.
Now that your budget is complete and your money is assigned to different categories, the important thing to do now is to STICK TO THE BUDGET. Make it a habit to refer to your budget when making any monetary decisions because it’s easy to mentally convince yourself you “need” something. Make sure you are really considering your purchases and how they will impact your budget.
Only spend the money you have. Credit cards, while handy, can lead you down a path of debt. If you use a credit card, only make purchases that will allow you to pay the bill in full each month. Understandably, there will be emergencies and a credit card may be able to help you out, but make sure you are factoring credit card payments into your budget to avoid excessive interest and late fees.
Keep in mind that a budget can be changed or altered at any time. If you pick up more shifts at work to increase your income, you can adjust your budget accordingly. Or, if you pay off a credit card balance, you can move those funds to a different expense. Your budget can change frequently, but it is there to make sure your income covers your needs and that you are making good financial choices. If you ever feel that you are overwhelmed or need assistance, it is best to reach out for help from an assistance agency or local bank.
First Keystone Community Bank is here to help you take control of your finances and create a budget. Visit your local branch or call us at 570-752-3671 to speak with a friendly Keystone Banker today!