1/8/2014 4:45 PM ET|
Create a personal budget in 8 steps
Designing a budget you can stick to doesn’t have to be a painful process.
Just like dieting, budgeting is often associated with deprivation and cutting back. However, creating and maintaining a budget doesn't have to be a painful process. "If you ... start thinking about [budgeting] as a way to concisely create a better environment for yourself using your resources, it will get that much easier," says Leslie Beck, a certified financial planner at Compass Wealth Management LLC in Maplewood, N.J.
1. Keep it simple. While a budget can be a great tool for managing finances, it can quickly become overwhelming if it's overly detailed or idealistic. "There are things that you will likely sacrifice when budgeting, but it's very important to be realistic and understand your own habits," says Kristin Wong, a contributor to the financial blog Get Rich Slowly. "If I have a problem area within my budget, like eating out or shopping, instead of trying to focus on everything and being too hard on myself, I pick that one area. The hardest part of a budget is sticking to it, so the easier you can make it, the better."
2. Set a time period. Establish your budget for a time period that's long enough for you to see results. Stephen Lovell, a certified financial planner with Lovell Wealth Legacy in Walnut Creek, Calif., suggests budgeting for one year at a time. Budgeting month-to-month can accommodate everyday living expenses and bills, but a yearly budget can help you also plan for larger and more infrequent expenses, like income taxes or holiday presents. "You don't want things to slip away," Lovell says. "It's better to be approximately right than precisely wrong."
3. Build an emergency fund into your budget. An emergency fund should be an essential component of every budget. It can help you finance unexpected expenses like medical bills so you don't have to pull income from other areas. "For example, allocate just as much to your savings as your emergency fund," Wong says. "Once you have that, it's a lot easier to maintain the budget if a big expense springs up."
4. Don't worry about finding the perfect record keeping method. Just as there are many ways to create a budget, there are also many ways to keep track of it. Whether it's through an online budgeting program like Mint or Quicken or on paper, stick to whatever works best for you. "Make sure you approach it in a manner that you are comfortable with," Beck says.
5. Make sure everyone involved is on the same page. Whether your budget affects your spouse, partner or roommate, communication about the established financial plan is crucial. "If you have two people who have really disjointed approaches to money, that's really going to be a problem in the long run," Lovell says. "You need to be aware of the other person's attitudes about money and realize that your own aren't universal. Everyone needs to be on the same page and after the same goals for the budget to be successful."
Being open with those around you about your budget can also help you create a support system while you work to get your finances on track. "Talking to friends really helped me," Wong says. "For example, even talking about it helped me when I was shopping with my mom. If I hadn't told her that I was on a strict budget, I probably would have spent more. She was there to hold me accountable."
6. Make adjustments along the way. If over time, your budget results don't match your expectations or financial needs, you may assume the plan is wrong. However, it's likely that you simply uncovered unknown problem areas. "The things that pop up will actually let you know what the real norm is, so pay attention to what it is telling you," Lovell says. "If you think, for instance, that you spend 12 percent of the family income on discretionary items, and you find after tracking for two months it's more like 28 percent, then something is off there."
7. Try adding on instead of only cutting back. Following a budget typically means making cuts in less essential areas or eliminating some costs completely. However, if reducing the amount of money going out isn't doing enough, look for ways to increase the money coming in. "Take a part-time job or sell something that is just sitting in your closet taking up space," Beck says. "People tend to think about just the one side of the equation when working to keep their budget on track, but there's another side that you can influence too, whether it's for a temporary or permanent basis."
8. Don't set yourself up for failure. Making sacrifices is part of managing expenses, but if you set restrictions too high and too soon, you will be less likely to follow your budget over the long term. "If you enjoy a latte every day, don't go from zero to 60 in terms of cutting back. Do it gradually," Wong says. "Nobody wants to stick to a budget that cuts out everything fun in their life. If you keep failing at your budget, you are going to be discouraged and you're not going to want to do it anymore."
More from U.S. News & World Report:
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You don't really need a budget. Just take 10-20% off the top and invest/save it. Spend the rest until it is gone. Then stop spending. If you run out of money before the next paycheck and have to go hungry, etc., then you will have learned a lesson from the school of hard knocks and adjust your spending accordingly in the next payroll budget cycle.
Easy enough? Sure beats the 8 step program.
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