Whether you're a college grad starting to think about your financial future or you're knee-deep, trying to provide for a family or comfortable retirement, creating a realistic monthly budget is a must.
But where should you begin? No matter your stage of life or the state of your finances, these five tips can get you started on the road to financial security and freedom.
Step 1: Organize paperwork
Before you can organize a budget, you need to organize your paperwork. Collect any documents connected to your financial status and payment history.
This can include bank statements, receipts, credit card statements, paychecks and so on. Compiling these records will help you establish a clear and accurate portrait of your finances, so you can prepare a budget to match.
Step 2: Evaluate your finances
Once you have your paperwork in order, you're ready to dive in. First, calculate your monthly income. This should include all income streams.
When you have your income, identify your fixed monthly costs, those that don't change every month. This means regular monthly bills such as rent or mortgage, utilities, car payments and subscription services.
Next, calculate your discretionary expenses. Your discretionary spending will likely fluctuate month to month depending on your spending habits (e.g., how often you eat out, go to the movies, buy groceries, etc.). To get a good estimate, take the average of three months worth of spending.
Finally, evaluate your debt, including credit cards, student loans, mortgage and vehicle. Before you can realistically set a plan to pay off debt, you have to know where you stand.
Subtract your fixed costs and discretionary spending from your income. The difference is how much you have left to work with.
If you're feeling stuck, consider talking to a financial advisor, such as one of the experts at Salin Bank. An advisor can help you make sense of your spending habits and offer direction on how best to make and meet your financial goals.
Step 3: Identify your goals
At a basic level, a budget will help you avoid spending more than you earn, but a budget can also help you achieve other financial goals like paying off debts, saving money for further education or preparing a retirement fund.
Remember that this is your budget, so it should work with you and for you. If your budget isn't clearly aligned with your financial objectives, you'll be less likely to stick to it, and it will be less effective in meeting your needs. By outlining your objectives now, you can map out a realistic budget later.
- Start an emergency fund.
- Pay off student loans.
- Save money toward a year-end vacation.
All are worthy financial goals, but you'll need to prioritize them to determine how to allocate your funds. For instance, let's say paying off student loan debt is your No. 1 priority. Your budget can reflect this in a couple ways. One is to allocate your funds solely toward your loan payments. The benefit here is that the debt will be paid off sooner, saving you money on interest.
Another option is to divide your extra funds across all three goals. For instance, you could designate $90 each month for student loans, $40 to an emergency fund and $25 to a vacation fund. The amounts reflect your priorities, while still working toward each goal every month.
Whatever you decide, make sure your budget is outlined clearly and allows you to track your spending easily through the month.
Step 5: Test the budget
You've outlined your budget — congratulations! You're not quite done, though. Right now, your budget is still just theoretical. To understand if it will work realistically with your lifestyle, you'll need to test it.
Keep track over the next month or two to see how well your budget works in practice. Take note of any areas that might have been overlooked or may need tweaking. Then, at the end of the trial month, you can adjust the budget accordingly.
By experimenting and reworking your budget over time, you'll be able to find the right balance for your short-term and long-term goals.
Creating a realistic budget doesn't have to be a nightmare. By following a few simple steps, you can get on track for a bright financial future.
Those with questions about creating a budget may stop by a local branch of Salin Bank to talk with a representative — find the closest branch here. For more on banking with Salin, visit salin.com or call (800) 320-7536.