Budgeting 101: Where Should You Spend Your Money Each Month?

If you have income and expenses, then you already have some form of a budget. A budget doesn’t have to be a complex spreadsheet or computer program to track your spending. When you pay the bills each month, you determine how much money is in the bank and how much you need to pay what you owe—simple budgeting. However, just tracking money coming in and going out is not going to help you achieve your financial goals. For that, you need financial planning, including gaining control of your monthly budget.

Budgeting is important for a number of reasons. Having a budget helps prevent overspending and shows you where there is unnecessary spending, including highlighting bad spending habits. It’s also the best way to plan your savings for short-term and long-term needs. Creating a household budget is the only way to get an accurate picture of your day-to-day finances. It is the essential foundation for any financial plan.

Creating a Basic Budget

Budgeting comes down to mapping your income to your expenses to determine what you should be spending versus what you actually are spending.

Start by listing all your sources of monthly income, including your paycheck, child support, dividends, pension payments, or any other sources of cash. It helps to break down your income into categories, such as money that you can count on and money that may or may not come in (such as money you loaned to a friend). The money you can count on is your real income for budgeting purposes.

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Now list all your expenses. Break them down into fixed costs, such as rent or mortgage payments, car payments, and student loans; and variable expenses, such as food, credit card bills, gas, and utility bills. As part of your expenses, calculate how much money you need to pay down your debt. For example, if you have credit card debt and only pay the minimum each month, you will carry the debt longer and it will cost you a lot more in finance charges. Instead of paying the minimum, determine how much you want to budget to pay down your credit card debt. Once you add up what you need for your monthly expenses—food, shelter, utilities, loan payments, credit card payments, and so on—that is your monthly nut.

Also be sure to include a savings plan in your budget. You want to allocate enough money to maintain an emergency fund—normally two months of expenses—and you want to pay as much as you can into your retirement fund.

Putting Your Budget to Work

When you subtract your monthly nut from your income, you should have money left over. If you find there is little or no money left, then you are clearly overspending. This is where your budget becomes extremely useful. You can use your budget to adjust your spending habits so you can have more money to put in savings or for other needs.

It’s best to focus attention on bigger monthly expenses. According to the Bureau of Labor Statistics, the biggest monthly household expenses are shelter, food, and transportation. See if there are ways to cut these big ticket items. For example, can you lower your rent, or will refinancing your mortgage help you reduce housing costs? Does it cost less to take public transportation rather than driving to work? Can you be more efficient in your grocery shopping?

Also look for items in your budget that you can eliminate. For example, can you reduce the number of premium channels that come with your cable service? Do you have subscriptions or other services you don’t need being charged to your credit cards? What about that gym membership you never use?

In addition to saving money, you can try earning more money. More people are taking on side hustles or gigs to make more extra money, whether it’s doing online work from home or driving for Uber or Lyft. You also might see if you can get a raise at work or find a better-paying job.

For people who are struggling with debt, a common strategy is debt consolidation. With debt consolidation, you are taking all or some of your outstanding debt and moving it into another loan or credit card that offers better terms. The objective is to reduce the finance charges on outstanding debt by finding ways to borrow at a lower interest rate and restructuring the monthly payments to make them more affordable.

Managing Your Money

Once you have your budget in place, you can see how much money you can allocate for savings. The easiest way to keep your savings targets on track is to automate funding your savings accounts. Use automatic funds transfers from your checking to your savings account to make sure to put money away each month, and account for that transfer in your budget.

Also consider using credit cards for strategic spending. Many credit cards offer cash back for some transactions, so you can earn money for planned expenses. Credit cards also can be useful to help you track your spending, giving you a breakdown by category in your monthly bill. If you have the discipline to pay off your credit card bills each month, there are a number of arguments to be made for using credit cards instead of debit cards. If you prefer using your debit cards, look for programs such as Pocket Change that generate money for your savings account with every debit card transaction.

To help you manage your budget, also consider setting up automatic bill payments. Your bank will let you schedule payments directly from your account so you are never late paying a bill.

The financial advisors at your community bank can help you set up the right budgeting tools. Shop for checking accounts that offer overdraft protection, easy-to-use savings, automated and mobile banking tools, and other services that help you manage your money.

If you take the time to develop a comprehensive household budget, you will save yourself stress and sleepless nights. Learning how to budget is your first step to ensuring a secure financial future.

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