This weekend’s challenge is to get your budget into shape. The reason this is challenge number four instead of challenge one or two is that it is important to know where you are financially and where you want to go. That is why the previous challenges had you look at your goals and your debt and set up a plan to pay it off. This week we are going to focus on getting your budget to really work for you.
Set up Your Budget
First, you need to set up your budget. You can do a monthly budget system or a budget for each paycheck. To set up your budget you need to list your income and your expenses. If you aren’t sure how much you spend on certain items, such as groceries, each month then check your checking account statement and your credit card statements to see how much you spent last month. This can give you the start of your budget. If you have are self-employed or work on commission it can be even more tricky to set up a budget, but there is a great plan that will help you create a budget for variable income.
Does It Match Your Financial Plan?
Next, you need to make sure that it is helping you reach your financial goals. Are you overspending each month? How much extra are you paying on your debt each month? Can you cut your expenses in order to reach your goals? Does your budget balance? If not you need to find expenses to cut. One easy way to start prioritizing your budget is to list the items which are necessities first, and then list the items that are luxuries. You should cut or reduce the items that are luxuries first and then look at the necessities. It is always a good idea to see if you can reduce the number of your necessities, but they should come at the beginning of the budget.
Identify Your Problem Areas
Then identify your problem areas. In my family, these are eating out too much, and impulse purchases for the kids. For these categories, we use an envelope system. This means that we take out the budgeted amount in cash and put them in envelopes. Once we have spent that amount we stop spending. You can even break it down into smaller envelopes and have one for each week for categories such as groceries and entertainment.
Track Your Daily Expenses
Tracking and adjusting your budget are also important factors in making your budget work. If you overspend in one category you have to cut spending in another. It is not difficult to transfer money between categories in your budget. Listing your transaction each day is essential, especially in the beginning. It will only take a few minutes a day, and you can do it less often once you have your spending under control.
Evaluate Again in a Month or Two
After two months you will need to evaluate your budget. Most people do a great job of sticking to their budget the first month because they are enthusiastic. The second-month reality sets in and many people slip. It also gives you a chance to see if you really can manage on the grocery budget or the gas budget that you’ve given yourself.