How to Build a Realistic Budget and Stick With It
Young families make dozens of financial decisions each day. Without a budget to drive those decisions, it's easy to get off track of what's really important. Here's how to build a budget you can actually follow.
At the core of any successful financial enterprise, be it a young family or a business, is a sound an effective budget plan that is used to drive all cash flow decisions, large and small, on a daily basis. Businesses have profit goals, and families have savings goals, both of which require budgeting and cash flow management to meet them consistently. Using the tools that are available to you online and in software packages will give you the ability to budget like a pro and manage your surpluses to increase your savings.
Keys to Budgeting Success
Begin with a Clear Vision and Focus
Generally, people without clearly defined objectives have no real purpose for their money other than to spend it if they have it. When you have a clear vision of what you want to achieve for you and your family, it is easier to focus on how you spend your money, so you can begin to save more. Families who have a real purpose for their money find more ways to live under the means, which is how wealth is built.
Establish Spending Priorities
Establish a clear spending goal for each of your priorities. If your cash flow is limited, target your top priority first. (i.e., to save $500 a month towards a $6,000 emergency fund). With the remaining cash flow, itemize all expenditures in two main categories - Essential and Non-essential. Begin with essentials such as mortgage/rent, taxes, food, transportation, personal need, debt. Then allocate the balance of your cash flow among non-essential items, such as dining out, leisure activities, household items, clothing, etc.
Pay Yourself First
Undoubtedly, you’ve heard this key budgeting tenet many times; that’s because it is fundamental to successful cash flow management, and it works. Many people lack the discipline to save what’s left of their monthly budget; so, by depositing a committed amount to your savings as your very first expenditure each month, you are assured of having enough for savings each month. All other expenditures should be budgeted around it.
Strike a Balance
If you also have a debt reduction goal, then a portion of that could go towards paying off debt, but never at the expense of your savings. This would be over and above your regular monthly debt payments. Find a balance between the two and divide your payment to yourself between the two. (i.e., 60% to savings and 40% to debt reduction). The important thing is to maintain the balance and stick with it each month.
Manage Your Savings
Once you have accumulated enough savings to meet your short-term goals, such as building an emergency fund, you can begin to allocate additional savings to longer term accounts that offer better rates of return. Once you begin to meet or exceed your savings goals, you will be further motivated to stick with your budget plan.
Stick with the Plan
The key to successful budgeting is maintaining the discipline to keep your expenses in line. The best approach is to strive to live below your budget each month; however, if you exceed a planned expenditure one month, you need to find another one to cut, but you need to avoid cutting your savings expenditure.
Managing Your Budget like a Pro
For about the cost of lunch for two (it’s probably in your budget), you can link all your online banking, credit card accounts and savings accounts to a computerized budgeting program that will download all of their financial data and organize it into a budget and a cash flow spreadsheet. Once it is all set up, most of your daily entries and financial transactions are recorded directly from your online accounts, saving you a lot of time, and ensuring greater accuracy. Mint.com is a free website with all the capabilities for real-time personal financial management.
Summary
In practice, a budget is at the core of any successful enterprise - both business and personal; however, it is the ability to strictly adhere to it that makes it effective. Budgets that are unrealistic or too difficult to manage are quickly swapped out for good intentions. However, budgets or spending plans that reflect your reality while providing a realistic path to improving your cash flow, can not only be motivating, they can be liberating as well, freeing you from having to make difficult choices. How? Because your budget will decide for you.