We all know the feeling, looking at your bank account and thinking “where did my money go?” In order to save money for whatever the future may hold you need to make a budget. Analyzing what and where you are spending your money can help create a clearer path to reaching your financial goals. Here are some steps and questions to ask yourself before making a budget.
What are my financial goals?
What are you trying to save for? You could be trying to buy a new car or go on vacation, these would be considered short term goals. Saving for retirement, future college expenses, or a vacation home would be considered more long term goals. Separating out goals into short term and long term can help you allocate savings between each one. Once you set goals you needs to dive deeper by asking a couple questions about each goal. How much will you need to attain this goal? How long will it take you to reach this goal at current savings rate? Once you know what you need to save you can prioritize your goals and allocate accordingly.
How much am I spending every month?
It’s time to look at all your monthly expenses and calculate how much you are spending. This can include things like your mortgage, car payments, or insurance. Don’t forget to include the small monthly expenses like gym memberships or online subscriptions. It can be helpful to split up expenses in to essential and non-essential expenses. Essential expenses will include housing, food, car payments etc. Non-essential may include things like entertainment and clothing. Once you have all your expenses listed out, add them together for a total monthly expense.
I have my goals and expenses, what now?
Now it is time to evaluate your budget. Are you spending more than you make? If so, you will need to find a way to lower expenses or increase income. Reducing non-essential expenses is the first place to start. Do you really need all those online subscriptions and daily coffee runs? If you are bringing in more money than you are spending, that’s great! How can you use this extra money to reach your financial goals in the timeframe you set? This is where you can determine how much you can put away towards certain goals to complete each one. Don’t forget to pay yourself first. Make sure you allocate at least 10-15% towards your retirement either via employer sponsored plans or your own savings account. Then allocate to your remaining goals.
How do I stick to my budget?
Monitor your budget closely! Make sure your budget is still realistic throughout changes that are bound to happen. Keep in mind that the tighter the budget, the harder it is to maintain. Stay flexible with your budget to keep the goals realistic and doable.
Making and keeping a budget can be hard, so make sure to follow the goals you have set and keep track of where your money is going in order to be successful.