“Before you recoil in horror at the idea of keeping track of every dollar that passes through your hands, remember that creating, maintaining, and periodically tweaking your budget is a vital aspect of preparing for retirement. You may be able to get away with ignoring your money choices while you are working full time and bringing home a good salary, but maintaining that same level of money ignorance as you prepare for retirement is a good way to ensure your plans and finances go off the rails. Knowing how you spend your money will allow you to make the decisions that make the difference between an enjoyable and well-funded retirement and learning to enjoy meals of crackers with ketchup.” Emily Guy Birken, The 5 Years Before You Retire: Retirement Planning When You Need it the Most

If you want to do more with your money and have a positive impact on your financial situation — a budget is critical. You need one so you can take charge of your finances and meet your biggest financial goals.

If you’re scrambling to pay the bills each month, you’re like most Americans and would probably benefit from having a budget. In America, we have a spending problem. Inherently, we desire to drive the latest luxury vehicle, wear the fashionable clothing or take the most extravagant vacation, whether we can afford it or not. The entertainment media and advertisers only encourage the conspicuous spending and consumption which compounds the financial woes of American society.

Schwab Wealth Survey

According to a Charles Schwab 2019 Modern Wealth Survey, “more than a third of Americans admit their spending habits have been influenced by images and experiences shared by their friends on social media and confess they spend more than they can afford to avoid missing out on the fun.” The survey examined how a 1,000 Americans think about saving, spending, investing and wealth.

Survey respondents tended to place the blame on social media platforms and not people, “ranking social media as the biggest “bad” influence when it comes to how they manage their money, while they put friends and family at the top of “good” influences.”

According to the survey, “three in five Americans pay more attention to how their friends spend compared to how they save, with an equal number saying they’re at a loss to understand how their friends are able to afford the expensive vacations and trendy restaurant meals they portray on social media.”

Furthermore, the survey finds that “the pressure to spend as a result of social media envy and the desire to not be left out of friends’ experiences is particularly acute among Generation Z and millennial.”

Why a budget

Establishing a budget and monitoring it on a regular basis is the best way to ensure you are in control of your financial future. Think of your budget as a spending plan. It helps you to be aware of how much money you have, where it needs to go, and how much, if any, is left over.

A budget is a plan you write down to decide how you will spend your money each month. A budget helps you ensure you will have enough money every month. Without a budget, you might run out of money before your next paycheck. Essentially, a budget shows you how much money you make and how you spend your money.

A budget helps you decide what you must spend your money on and if you can spend less money on some things and more money on other things. For example, your budget might show that you spend $100 on clothes every month. You might decide you can spend $50 on clothes. You can use the rest of the money to pay bills or to save for something else.

You might need money for an emergency. You also might need to buy something more expensive, like a car. Saving money might help you buy a car, put a security deposit on an apartment, or pay for something else expensive.

Start a budget by gathering your bills and pay stubs. Think about how you spend money, besides paying your bills. For example, do you buy a cup of coffee every day? After a month, that coffee money could add up to an expense you might write down.

When you have your bills and pay stubs, recommend you write down your expenses. An expense is money you spend. Then, write down how much money you make. This is called income. And, finally, you should subtract your expenses from how much money you make. If the number is less than zero, you are spending more money than you make. Look for things in your budget you can change.  Maybe something you do not need, or a way to spend less. Use a Budget Worksheet to help you create a budget.

A budget is something you use every month. A written budget will help you to see where you spend money, to figure out where you can save, and to make a plan for how to spend and save your money. Your budget can help you save money for the future. You can make savings one of your expenses. You might find ways to spend less money. Then you can put money into savings every month – maybe into a bank or credit union.

Why Save Money

It can be hard to save money. It is very hard when your expenses go up and your income does not. Here are some reasons to try to save money even when it is not easy.

• Emergencies – Saving small amounts of money now might help you later. Everyone has expenses they do not expect.
• Expensive things – Sometimes, we have to pay for expensive things – like a car, a trip, or a security deposit on an apartment. You will have more choices if you have money to pay for those expensive things.
• Your goals – You might want to pay for college classes. Maybe you need to visit family in another country. You can plan for these goals and save money. Then you might not have to use a credit card or borrow money to pay.

How to Save Money

For one month, write down everything you spend. This would include small expenses, like a cup of coffee, which can add up to a lot of money. When you know where you are spending your money, you can decide what you might not want to buy.

Additionally, pay with your credit card only if you can pay the full amount when the bill comes. That way, you do not pay interest on what you owe. And, pay your bills when they are due. That way, you will not owe late fees or other charges.

Keep the money you are saving separate from the money you spend. Consider opening a savings account in a bank or credit union. If you keep cash at home, keep the money you are saving separate from your spending money.  Keep all your cash someplace safe.

Budget is a Planning Tool

A budget is a plan that shows you how you can spend your money every month. Making a budget can help you make sure you do not run out of money each month. A budget also will help you save money for your goals or for emergencies.

Make a budget by writing down your expenses. Expenses are what you spend money on. Expenses include bills such as expenses that are the same each month, like rent; expenses that might change each month, like utilities; and, expenses that you pay once or twice a year, like car insurance.

Other expenses includes items like food, gas, entertainment, clothes, school supplies, money for family, unplanned expenses, like car repairs or medical bills, and credit card bills. You might have bills that change every month. Look at what you paid for the same month last year. You might need $200 for your gas bill in January, but $30 in July.

Write down how much money you make. This includes your paychecks and any other money you get, like child support. Then, subtract your expenses from how much money you make. This number should be more than zero. If it is less than zero, you are spending more money than you make. Look at your budget to see what you do not need or what you could spend less on.

Making a Budget

Below are four methods for helping you organize and manage your monthly expenses.

Fixed and Flex

The first budgeting technique involves grouping your expenses into two categories—“fixed,” which are must-haves like food and utilities; and “flex,” the nice-to-haves like vacation or dining out Keeping these definitions in mind, follow the four-step process below

1. Gather 6 to 12 months of bank statements, receipts and other financial records.
2. Separate those expenses into “Fixed” and “Flex” columns.
3. Add up your monthly “Fixed” expenses, then subtract the total from your monthly income.
4. What’s left over is your “Flex” spending money.

Although you’re still dealing with the same amount of money, looking at your finances in a more organized way can help get your spending under control.

50/30/20 rule

Another budgeting technique is the 50/30/20 rule. It involves dividing your monthly income into three ”buckets”:

• 50% (or less) goes to necessities such as housing, student loans and utilities. These are expenses you have to pay every month.
• 30% (or less) goes to nice-to-haves, such as entertainment, hobbies and travel.
• 20% (or more, if possible) goes toward savings and paying down debt.

The 50/30/20 rule can be adjusted based on your short- and long-term goals, but be careful about confusing “nice-to-haves” for “necessities.” Several dinners out each week and unlimited data plans may be nice to have, but they aren’t essential.

Tracking

Tracking takes the most time, but it provides the greatest insight into your spending habits.

First, create columns for your spending categories (e.g. groceries, gas, utilities, medical, entertainment, and child care). Add a “miscellaneous/unexpected” and a “savings” category as well.

Next, divide your monthly income among the categories and then pay your bills/save accordingly. It’s important to list all items and subtract the amount you spend in each category so you know where your money is going. Once a category is “out of money”:

• Stop spending in that category if possible, until you get your next paycheck
• Consider making trade-offs by moving money around from other categories

Use a spreadsheet, an online service or, if you prefer to go “low tech,” a notebook and pen will work just fine.

Allowance

One last idea is to set up three accounts: one for expenses, one for fun money, and one for savings. Deposit percentages of your paycheck into each account, and pull from the appropriate one throughout the month to cover your living costs and your discretionary spending.

Use a Budget

1. A budget should meet your “needs” first, then the “wants” that you can afford.
2. Your expenses should be less than or equal to your total income.
3. If your income is not enough to cover your expenses, adjust your spending by deciding which expenses can be reduced or eliminated.

You can use your budget at the beginning of every month to make a plan for how you will spend your money that month. First, rite what you think you will earn and spend. Afterwards, rite down what you spend. Try to do this every day.

At the end of the month, see if you spent what you planned, use the information to help you plan the next month’s budget.

Your money is stretched in many directions. Daily expenses, entertainment, life events and long-term goals—all competing for the same dollar. Budgeting can help ensure you’re covering the necessary monthly expenses, saving for the future and—maybe—have some extra cash to reward yourself for your good work.

Sources:

1. https://www.aboutschwab.com/modernwealth2019
2. https://www.consumer.gov/articles/1002-making-budget#!what-to-know
3. https://www.trulia.com/blog/budget-ideas-for-people-who-hate-budgets/?fbclid=IwAR3DyoX3GJmAjEvIOaBKa9THQcNMTtMXjmlfINcSyl4l0v4l9K8tqhdx2yk