Constructing a budget is a task most of us dread. In order to build up your savings, however, you need to be accountable for your spending. Family finances can be overwhelming, but the math is simple — to build savings to accomplish our short- and long-term goals, we need to spend less than we make.
At the same time each year, I sit down with my husband to put together our annual budget. We think about our savings goals and how much we want to set aside for short-term “wants” (like travel and household updates) and long-term “needs” (like retirement). It is always a struggle to make the time and expend the energy, but we come away with a plan that puts our minds at ease and sets us in the right direction for the coming year.
Creating a budget takes some work, but the long-term rewards make it worth the effort. Here are five easy steps to get your budget into place:
Review your spending. The easiest place to start making your budget is with what you already know. Look at your last six months of spending to determine where your money goes. Create a schedule listing all major spending categories — from housing, health care and clothing to food, cars and travel. Make sure to look at all your cash flow sources (include your checking account and credit card data) so you don’t miss anything important.
Break it down into discretionary and non-discretionary spending. Separate must-have spending, like your mortgage, health insurance and food, from optional items, such as entertainment, recreation and travel. Spending on non-discretionary items may be harder to adjust but, if needed, you can take a hard look at these expenditures throughout the year. In the non-discretionary category, remember to include some money for unplanned but necessary expenses, like home and auto repairs. For the discretionary items, determine if there are easy places to reduce spending. This may include cutting back on things like travel, food and entertainment and gifts.
Include a line for savings. Instead of just seeing what you have left over at the end of each month, be proactive and set up a line item for savings. Target at least 10 percent of your income as a savings goal, and put it away before you have the chance to spend it. Make saving easy by moving those funds to your retirement or savings account at the beginning of each month. Build in amounts for short- and long-term savings goals, and consider making it a permanent part of your budget.
Reduce unnecessary spending. Once you have logged all your past expenses, you can start looking for opportunities to cut back. Do your discretionary items represent an overly large portion of your monthly spending? See if you can reduce or eliminate daily coffee runs, eating out instead of cooking in and gym or other memberships that may go unused. The little items can add up over time to big dollars, which can give you more to allocate toward savings each month.
Track, review and adjust. Creating the budget is a big first step, but it is not the end of your work. Make sure to track and review your spending on a regular basis. Update as you go or you won’t stay focused. Circumstances do change over time, so make adjustments as needed, but try to be disciplined and stay true to your stated goals.
Budgeting can be a painful process, but it creates discipline and accountability. Set up a time every year to revise and revisit your budget, as I do with my husband, so you’ll make this part of your annual routine. Making sure you stay true to your plan will allow you to build your savings and see your goals become reality. If you take the time to build a budget, reduce unnecessary spending and commit to saving, you will get through the year ahead financially. You’ll also be proud of everything that you have accomplished.
This commentary originally appeared January 27 on KVUE.com
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