10/24/2012 11:45 PM ET|
How to stick to your budget
Making a spending -- and savings -- plan is just half the battle; learn about pitfalls and how to keep yourself motivated to stay on track.
At some point, you've likely decided to put aside excuses and to make a genuine effort to improve your financial situation. You probably made some form of budget for your monthly expenses or set some ambitious savings target, only to discover you're spending outside your budget and/or pilfering your savings. Sometimes the reason for cheating on your budget is legitimate -- emergencies happen -- but a truly effective budget accounts for crises.
Even if your budgeting has not gone to plan, you can get things back on track. Here's how to get started again, and how to put what you learn to work for you.
First, you need to determine whether your budget is realistic. Have you fallen down because it was unachievable, or are you simply spending more than you should be? Many people set a budget and savings plan without fully evaluating their finances. Get honest with yourself about your finances and lay the foundation for your financial planning with these three steps:
- Gather every financial statement you can. This includes bank statements, investment accounts, recent utility bills and any other information related to your income and expenses. Next, record all of your sources of income. This could be from employment, rent and investments. Record your monthly total take-home pay.
- Create a list of all your monthly expenses. This may include your mortgage payment or rent, car payments, auto insurance, groceries, utilities, entertainment and dry cleaning. Use your bank statements to ensure that these figures are accurate. Then break this down into two columns: fixed and variable. Some expenses are the same each month and are essential spending to maintain your way of life. Then list your variable expenses. These expenses can change from month to month.
- Total your monthly income and monthly expenses. If your income exceeds your expenses, you have the potential to save. This means you can look at what you are doing with this excess -- if the money is not going into savings, what are you spending it on? (If your income is less than your expenses, you need to cut back on expenses to avoid growing debt.)
How to make cuts
Once you have examined your fixed expenses, take a look at your other expenditures. Are these areas where cutbacks can be easily made? Whether you are budgeting to avoid debt or to put money into savings, cutbacks can help you free up money. Check to see where you have money leaks. For example, do you spend much of your disposable income on meals out? Your bank statements and credit card bills will show you where you may be overspending. Once you identify the areas that you want to cut back on, you can take these steps to corral spending:
- Avoid impulse buys. Many people who fall short of their savings goals are impulse buyers. You won't be able to save money effectively until you address this behavior. Impulse buys eat into disposable income and can mean wasted money. If you see something you want, try to take at least a day to decide. If the cost is significant, make sure you are getting a good price. Go online to see if you can find a better deal.
- Keep track. Even if you start well, your budget may loosen with time. To ensure that you stay on track, keep daily logs of what you spend so you get a true picture of your spending habits. This will allow you to see if you are slipping into bad habits. If you see a pattern, take action right away. Don't let months pass before you address it.
- Choose paper over plastic. Almost everyone uses credit or debit cards from time to time. While it's convenient, it makes it difficult to get a feel for what you are spending. One way to combat this is to use cash instead of plastic. Every Sunday, take out your allotted spending money for the week, work out what your daily allowance is and stop spending when your money runs out.
- Keep your goals in mind. From time to time, you'll want to re-evaluate your budgeting goals. A combination of short-term and long-term goals will make it easier to stay motivated. Why do you want to save money, and how much do you need? Are you trying to clear debt or save for a house or a vacation? Write your goals down and put the list where you will see it often. This will serve as a reminder of your goals and should make it easier to stay the course financially.
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