Where did all my money go? If you’re one of the many people asking this question every month, you should probably consider creating a budget.
Small purchases add up quickly, and it’s easy to lose track of where your hard-earned money goes. A budget helps you track your spending so you can make ends meet now and save money for the future. A budget will help you take charge of your money, spend wisely, work toward your financial goals, and save money for emergencies.
Creating a budget can seem overwhelming at first. It’s a big job, and an important one, but it gets easier every time you do it. Once you do the work of creating your first budget, all you need to do is keep it updated.
Failing to plan is planning to fail. Follow these simple steps, and you can seize control of your financial future.
1. Identify Your Financial Goals
The first step in making your budget is to determine your financial goals. This should be more specific than simply “I want to have more money.” What do you need money for? Are you saving for retirement? Working to pay off debt? Buying a car? A house? Saving for college? Just trying to make ends meet each month?
It’s fine to have more than one financial goal — most households will have several. Identifying your goals will help you understand how much money you need to save each month to accomplish them. It will let you prioritize how you spend your money and focus on the things that are most important to you.
2. Write Everything Down
Your household pays bills and makes dozens of purchases every month. You might pay these with a combination of cash, checks, debit cards, auto-pay, and likely several different credit cards. It can be hard to keep track of it all. That's why writing everything down is so important. It may seem overwhelming, but we'll break it down step by step.
There are also useful budgeting apps for your smartphone that can link to your accounts and automatically track your purchases. For a more hands-on approach, you can create spreadsheets on your computer. If you really want to go old-school, you can write it down by hand in a business ledger, budget worksheet, or even a regular old notebook.
How you do it doesn’t matter as much as being consistent and getting all the numbers down where you can see and review them.
3. Determine Your Income
Your income is the total of all your wages, salaries, profits, and other earnings you receive each month. Your paycheck is the most obvious source of income, but be sure to include income from assistance or benefits programs. Include your spouse or partner’s income if you aren’t the sole breadwinner of your household. Don’t forget other regular sources of money, such as tips or side gigs. Don’t include money that you won’t get regularly every month, like bonuses or overtime pay, as you can’t rely on that as regular income.
If your income varies a lot from month to month, as is the case for many self-employed people, average it out over several months. If you want to be on the safe side, you can just use the lowest monthly income for your base salary.
Write your monthly income down in your budget plan. The results may be surprising. Your income may be either lower or higher than you realized.
4. Determine Your Expenses
Figuring out your income is relatively easy. Expenses are a little harder to track, and it's going to require time and effort. Start by tracking your spending for three months and average that out to find your monthly expenses.
Look at your credit card statements, bank statements, checkbook, and receipts to see where your money is really going. Divide your spending into categories — housing, utilities, food, clothing, entertainment, and everything else - then determine whether each of these is a fixed expense, a flexible expense, or an occasional expense. If you put money in savings every month, count that as an expense. Include any payments you make on loans or credit card bills, including interest.
Figuring out your fixed expenses is relatively simple. Fixed expenses stay the same from month to month, and include things like rent, cable and internet bills, some utilities, and auto or student loan payments.
Flexible expenses, also known as variable expenses, are costs that vary from month to month. They include things like food, clothing, and entertainment.
Flexible expenses can get out of control pretty quickly, but they’re also where you can often make the most significant spending cuts. There’s usually not too much short of moving you can do about your rent payments, but almost everyone can save money by eating out less or spending less money on entertainment.
Finally, don’t forget to factor in your occasional expenses. These are expenses that are billed quarterly, semi-annually, or yearly. Occasional expenses include taxes, insurance, and memberships. Add up roughly how much you spend on all occasional expenses over the course of a year and divide by 12 to get your monthly cost. Be sure to set aside this amount every month so you’re prepared when occasional expenses come up.
5. Create and Maintain Your Budget Plan
Now add up all your expenses and subtract that number from your income. If you end up with a negative number, you have some expense-cutting to do right away. If your number is positive, it likely isn’t nearly as large as you’d like. Either way, go over your expenses and figure out where you’re spending too much money.
Now that you know where your money is actually going, you can start to control where you want it to go. Consistency is key. Review your budget at the end of each month and use that information to plan for the upcoming month. To achieve your financial goals, you may need to cut back on certain things to save for more important expenditures.
6. Adjust Your Plan
Don’t worry about getting your budget perfect on the first try. The most important thing is that you have a budget — you can make adjustments and updates each month as you go.
Keep your budget plan updated every month. If you get a pay raise, add it to your income. If you experience an unexpected drop in income or a new regular expense, figure it into your budget and make the necessary cuts.
7. Build an Emergency Fund
Life happens. It could be a lost job, car repairs, injury, illness, or any one of countless potential situations. Everyone faces a financial crisis now and then, but an emergency fund can keep it from becoming a catastrophe.
Your emergency fund should have enough money to cover your basic living expenses — food, housing, utilities, transportation, and the other things you need to live and work. Make it a part of your budget plan. Keep your emergency fund in a separate account from your savings. You can (and should) add to your emergency account, but never take money out of it, unless there’s an emergency.
Ultimately, your emergency fund should have enough to cover the basic living expenses of your household for 3-6 months. This figure may seem daunting; most people don’t have that kind of money just lying around. Don’t panic — you won’t need to come up with that money all at once. It takes most people several years to build an emergency fund.
One popular model is to start by saving enough money to build an emergency fund of $1,000, then shift focus to eliminating debt. After you pay off some debt, you can continue working toward the 3-6 month goal.
Take it one step at a time — first focus on building an emergency fund for just one month’s worth of expenses. At minimum, add at least 1% of your basic living expenses to this fund every month. If your basic living expenses are $1,500 a month, add another $15 each month. If you can afford to add more, do so.
If you have an emergency while building your fund, don’t be afraid to dip into it. That’s what it’s there for. Continue building your emergency fund once the crisis has passed.
Having an emergency fund will take some of the stress out of an already stressful situation. It will give you the time you need to figure out your next steps.
Prepare Yourself to Succeed
A budget is one of the most important tools for making smart decisions with your money. It’s a crucial first step, but it isn’t your final one. One of the most important things you can do to ensure that you’re on track to reach your financial goals is making sure you have the right types of accounts.
Having a single checking account and a single savings account is a fairly standard, traditional approach to managing one’s personal finances. At First Service, we’d ask you to consider diversifying that a bit.
Multiple Checking Accounts
For example, you might consider setting up three separate checking accounts – one for your fixed expenses, one for occasional expenses, and one for flexible expenses. This may sound like a lot to manage at first, but this can be a great way to ensure that each dollar you earn is being allocated the right way. And keep in mind that most organizations that offer direct deposit will allow employees to designate set percentages of their income to go to multiple accounts, so making sure the appropriate amount goes into each account is actually fairly simple.
It’s also worth mentioning that there are some great free checking account options out there, so having three accounts won’t cost any more than only keeping one.
Since your budget will help you understand roughly how much your fixed expenses will be each month, you can determine what amount you need to deposit into your fixed expense account. Additionally, since your budget will have given you a good idea of what your occasional expenses are, you can also determine a specific amount you can deposit into your occasional expense account. Whatever’s left from your income can be split between flexible expenses, savings, and investments.
Multiple Savings Accounts
When it comes to your savings, your strategy should reflect your goals. We do believe that part of keeping a budget successfully is building an emergency fund as described above, and that should probably be its own savings account. However, if you have additional financial goals, it may make sense to have additional savings accounts. For example, if you’re saving for a big occasion like a wedding, vacation, or some sort of down payment, you may want to create an additional savings account specifically for that purpose. Remember, the point of maintaining a budget is to reach your financial goals. Your savings account - or accounts - should be aligned with those goals. Some savings accounts may also earn dividends, so keep that in mind when choosing how to structure your own finances.
How Money Market Accounts Work in Budgeting
Depending on how frequently you plan to make withdrawals from your respective savings account(s), it may make sense to put your money into a money market account. Money market accounts are savings accounts that earn higher dividends than standard savings accounts while still allowing you some access to your funds. At First Service, our money market accounts can be linked to checking accounts to provide an extra layer of overdraft protection. They are also eligible for transfers through digital banking. We allow unlimited deposits and up to 6 withdrawals per month. We also waive the monthly fee for money market accounts with a minimum balance of $2,500.
Making Your Budget Work for You
Now that you’ve learned more about the importance of keeping a budget and how to get started, all that’s left is taking the first step. If you’re serious about taking control of your finances, this is where it all starts. What will you do today to improve your financial future?