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A budget is an essential tool for properly managing your money. It helps you spend within your means, maintain and build credit by paying bills on time, and save for emergencies or goals.
Creating a budget takes some effort. Use these five steps to help you get started.
To create a budget, start by asking yourself these important questions:
These answers are critical; they help set the benchmark for your saving potential. For example, you can’t expect yourself to save $300 each month if the difference between your monthly income (after taxes) and essential expenses is $200.
Continue by taking a snapshot of all of your assets, including any savings, retirement accounts, and investments so you know what your entire financial situation looks like. This step will be helpful when outlining your financial goals.
Now that you know what your financial picture looks like, you can identify areas that need extra attention. Perhaps your emergency savings fund is lower than you would like, or you’re not putting enough money toward retirement. These can be included in your list of financial goals.
List each of your financial goals and label them as short term (within five years) or long term (more than five years out), then prioritize them in order of importance. Here’s an example:
In step one you calculated your monthly income after taxes as well as your monthly expenses. Now it’s time to start crunching some numbers.
List those numbers in a table or worksheet format (there are plenty of online calculators to choose from) and don’t forget to include contributions to your financial goals. Here’s an example:
Once you’ve listed your expenses, critically analyze your inputs. Are you spending too much on dining out each month? Cutting down on a non-essential expense like that can help you reallocate your money to another area, like retirement. Or, perhaps you need to budget for a down payment on a new car. Analyze your current income and expenses to see if there’s room in the budget. (This might require decreasing your budget for other expenses.) You can update these numbers as your situation changes, whether you receive a raise at work or you add a new goal.
Responsible credit practices are essential to keeping a good budget. Erratic spending can result in overspending, which can jeopardize your ability to stay on budget as well as have a negative impact on your credit score if you can’t make timely payments.
Group credit card charges into your budget categories so you properly track all of your transactions and don’t steer off course.
A budget is only effective if it’s followed, so monitor each category to see if your spending mirrors your predetermined budget. For example, if you allot $150 for personal care each month but you spend $200, you’ll have to find a category or two where you can make up for the lost $50.
Once you feel comfortable with your budget, stick to it. Hold yourself accountable so your expenses don’t exceed your income, otherwise you could fall short of some of your financial goals.
It’s important to remember a budget is not set in stone; it can be updated based on any changes in your life. For example, your budget will obviously be impacted if you start a family or experience a job loss. Furthermore, you may notice you’re spending far more on food each month than you originally allotted, or find you have more room for savings than you anticipated. Find what works for you and commit to the budget.
Planning and prioritization make you ready to reach them all. Let us help you find the light at the end of the tunnel.
Our financial experts can help you create a savings plan. Stop by your nearest Citizens Bank branch to speak with a banker today.
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