How to Set a Budget and Stick to It

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No one wants to waste money, and you probably agree that setting a budget is a good idea. But how do you create one and stick to it? It’s not as easy as it sounds. On the other hand, if you start simple, set realistic goals, and give yourself the occasional reward, you could save money, lower your debt, and begin to build financial security. Are you ready to start?

Determine what you spend. The most challenging part of building a budget is taking a hard look at what you spend. But you’ve got to do it! It’s the only way you’ll be able to separate your fixed expenses from those areas you could cut back on. Take these 3 steps and you’ll be on your way:

1.       Pull a year’s worth of your fixed living expenses like rent and utilities. Divide by 12 and you’ve got your monthly expenses.

2.       Gather your receipts for three months. Include EVERYTHING. Food, clothing, transportation, entertainment, even the occasional spiced latte, need to be part of your variable expenses. Divide by 3.

3.       Allow for seasonality. Do you spend more money around the holidays? Or during the summer when you go out a lot with friends? Consider how much you spend during the peaks and valleys of the year and add its average to your spending.

Determine your monthly take home pay.  Don’t rely on your gross income or even the adjusted gross income from your tax return. Use your pay stub or automatic deposit record to determine what you actually earn after taxes and deductions. Do not include bonuses. If you earn tips, base your income on their average, disallowing that one time the guy handed you a $100 bill on a $60 tab and said keep the change. A year’s worth of info will give you the most accurate data and help you set a realistic budget. Take the whole year and divide by 12.

Set a goal (or two). It’s easier to build a budget when you know why you’re doing it. Are you saving money to go back to school? Do you want a better apartment, or your own home? Visualize what you want and reach toward it. Use pictures to reinforce what you’re trying to accomplish. A cap and gown taped to the door can be a reminder every time you step outside that every penny you spend could have a better purpose.

Write out a budget. There are apps like Quicken and Mint that can help you build a budget, pay bills, and monitor all your transactions. But when you’re first starting out, think simple. A spreadsheet and a pencil might be the way to begin the process. Add up all your expenses and take a hard look at those variables. Were there any surprises? Even before you measure your expenses against your income, consider places to trim. Do you really need to eat out twice a week? Could you bring leftovers for lunch instead of opting for fast food? Most importantly to consider is what you would rather do with that extra cash.

Compare your income to your expenses. Now comes the fun (or sometimes scary) part. What’s the difference between your income and expenses? If your income is higher than your expenses, you have a surplus you can put toward your goals. If things aren’t looking so good, you need to take immediate action to trim your expenses. Go item by item. And remember to breathe. This budgeting thing gets easier as you go.

Stay focused, but reward yourself. Use your budget to pay your bills on time, every month. Try to save at least 15 percent of your take home pay for your long term goals. After a couple of months, if you’ve met your goal, reward yourself. Maybe a movie out or a light lunch? After all, you’ve earned it.

At Charter College, we know how hard it can be to set budget goals and follow through. But we believe in you! Build a budget you can live with, stick to it, and let us know how you’re doing.