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  • Valerie Gospodarek, CFA

6 Easy Steps to Creating & Implementing a Financial Budget

credit card expenses

Has your financial situation recently changed or will it be changing in the near future? If so, now is the best time to create a budget and ensure that your spending is appropriate for your income level and future financial goals. Perhaps you are looking to purchase a new house. Not only will your mortgage likely change, but so may other costs associated with this new home ownership – utility bills, maintenance expenses, property taxes, and insurance bills. How will you truly know if you can afford this new house and still stay on track to meet your other financial goals without looking at the details?

Step 1: Change Your Mindset

With that in mind, the first step is looking at your budget as a puzzle to solve, particularly if you suspect your new expenses may exceed your income. As I mentioned in last month’s blog, 5 Easy Steps to Creating an Estate Plan, if you take the emotional aspect out of the process by just looking at it as a puzzle, you are less likely to procrastinate on it or get stressed by it. Keep in mind, it’s better to know any potential shortfalls now so that you can make the necessary changes as soon as possible.

Step 2: List Your Income

The second step is creating a spreadsheet and detailing all of your income (after taxes) at the top. Don’t forget to include any income you might receive beyond just wages, such as investment income, alimony and child support, and pension and social security payments.

Step 3: Detail Your Expenses

The third step is detailing all of your expenses in your spreadsheet below the income section. Breaking your expenses into categories, such as loan payments (mortgage, auto, etc.), insurance premiums, utility bills, childcare expenses, and membership fees helps to ensure you aren’t missing any major expense.

Step 4: Track Your Day-to-Day Spending

The fourth step may be the most difficult one to do, particularly if you pay cash (and don’t keep receipts) for many of your daily purchases: tracking your day-to-day spending. If you typically use your debit or credit card, though, this step simply entails analyzing your statements and grouping your spending into categories such as groceries, dining out, gasoline/parking, clothing, etc. While somewhat tedious to do by hand (I recommend using at least 6 months of statements to get an accurate picture of how much you spend on average each month in each category), there are a few ways to potentially simplify this process. First, your credit card company may already provide you with a nice summary of your expenses by category. (Those may not be the categories you want and certain expenses may not be categorized properly, so it’s best to double check these summaries before just blindly using them.) Second, you may wish to start using a budgeting app, like Mint or Hello Wallet. This can make tracking your expenses quite easy…but don’t forget to include any subscription cost as an expense in your budget!

Step 5: Subtract Your Expenses From Your Income

Now that you have a good list of your income sources and expenses, the fifth step is subtracting your expenses from your income. The result of this calculation is hopefully positive and represents the funds you have available for your other financial goals. If the result is negative or not as positive as you’d like, here is where you will need your puzzle solving skills from Step 1 - look at your expenses to see where you can cut back (can you eat at home more often, cancel that gym membership you don’t use, or consolidate your three online streaming services down to one?). If you cut back everywhere you can and your expenses still exceed your income, you may wish to look at ways to increase your income. This may include a job change, taking on a part-time job, delaying retirement, or tapping into some of your investments. Be creative, but be sure not to sacrifice long-term savings/investing for short-term income needs for longer than absolutely necessary. Doing so only kicks the can down the road!

Step 6: Continue To Track Your Expenses

The sixth and final step is continuing to track your expenses to ensure that you are sticking to your new budget. This is where a budgeting app can also be helpful, as you can monitor your spending and adjust your expenses in real-time. If you aren’t tech-savvy or prefer not to share your personal data in this manner, you can simply follow steps 3 and 4 above for the same result. It doesn’t really matter how you do it, just that you do it!

If you need help creating your budget, give me a call at (925) 954-4966 for a free consultation.

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