Do you have a budget? It’s a core factor in improving your financial well-being – both for today and the future. Consider this guide your “budget buddy” and get started today.
What is a budget?
We hear the word a lot, but what does it really mean to make a budget? At its basic form, a budget is a spending plan you develop by dividing your take-home income into categories so that it covers all the expenses you encounter in a month. While there are various methods for creating a budget, it should take into account the following:
- Fixed expenses, such as rent/mortgage payments, auto loans, utilities, insurance, student loan payments — whatever expenses are the same every month
- Variable expenses, like clothing, entertainment, groceries, hobbies, travel, credit cards, etc.
- Saving, which should include both short- and long-term savings goals like retirement
During this budget step, it’s easy to get tripped up considering areas like clothing or vacations, which fluctuate depending on your needs and activities. Budgets should be flexible to account for variances in expenditures: Some months, you might blow your whole clothing allowance getting fitted for spring, while other months you can cut back and move those funds to cover an upcoming weekend getaway.
It’s also wise to plan to save for future hits to your budget; for example, if you know you have a high-ticket purchase coming up, earmark this month’s funds in advance.
How can a budget contribute to financial wellness?
Creating and sticking to a budget requires some discipline. You may want those new shoes or to accompany your buddy on a ski outing, but unfortunately, you allocated the funds to another area. One option is to search your budget to identify variance in another category. For example, maybe you have sufficient funds to join the gang for an evening at a fondue restaurant and pretend you’re on the “après ski” part of the ski adventure.
In that way, a budget allows you to spend money in areas you have designated as priorities. You can enjoy the evening out knowing your entertainment budget covers it without feeling guilty about spending it. The key is being clear on your “needs” compared with “wants” and making sure you’re also committing to paying down debt and feeding your savings account for a healthier financial future.
What are some common mistakes people make when budgeting?
Wondering if you’re doing it right? Making a budget in the first place is the key step, but after that, you want to make sure you’re practicing good budget hygiene. Here are four ways it’s easy to go awry:
Failing to track spending throughout the month
Your budget only works as hard as you do, which means committing to record keeping. Fortunately, it can be super easy to take care of anywhere with mobile banking and a banking budgeting app, such as the Valley app. The goal is to account for every dollar you spend, not in a punitive way but to alert you if a budget adjustment is needed. Forgetting to record a shopping spree or even a bump in your streaming fees can put your budget out of order and leave you wondering why your checking account is depleted.
Using a “set it and forget it” mode
Your life changes regularly, and so should your budget. Make an appointment for a routine check-in to revisit your budget and ensure it reflects your lifestyle. Maybe you’ve started working from home more so you can save money on transportation costs and reallocate it to your grocery budget. Or maybe you’ve had a significant life event, like scoring a raise or moving to a new city. Account for any change in your monthly income or spending to ensure your budget still works for you.
Spending because it’s there
With an untouched portion of your food budget tempting you, it’s easy to decide to go ahead and order takeout. Instead, put your patience to work and remind yourself you don’t have to spend an entire budget category just because it’s available. Set it aside for a future month when your friends are going to a posh brunch, which you can then attend guilt-free, knowing that two months’ dining budget awaits you.
Neglecting to congratulate yourself on a job well done
Did you reach a new milestone in your emergency fund saving or swap an evening out for a group potluck? Great job! Take the time to celebrate budget wins, big or small. On that same note, make sure to work in small splurges. If your budget is too austere, you may be tempted to throw caution to the wind, which can lead to a buying binge.
Now’s the time to get started on that budget
Are you inspired to create a first-time budget plan? There’s no time like the present to take this critical step that will put you on the path to achieving your financial goals. For more personal finance insight and budgeting tips, visit the Valley Learning Center today.