3 Steps to Start a Budget

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Whether you are starting your first job or have been retired for ten years, creating and maintaining a budget is critical to set yourself up for financial success. A budget can help prioritize long-term saving, reduce the amount of credit card or debt-related spending, and empower you to take control over your finances. While developing a budget can be a daunting task, the three simple steps below can help you get started.

Step 1: Determine Current Income vs. Spending

Identifying your current income versus spending establishes a baseline to determine whether you are spending more or less than your income.

To establish your monthly income number, look at the total amount deposited into your bank account each month from your paycheck.

To identify your monthly spending, a helpful tool is your quarterly credit card snapshot. Add to your monthly credit card spending items paid via cash, check or online bill-pay like utilities, ATM withdrawals, car payments, mortgage payments or large gifts, and you should have a number that represents your typical monthly spending.

Compare your income to your average monthly spend amount. If your monthly spending is higher than your monthly income, you know right away that you will need to make some lifestyle changes to maintain a healthy budget.

You can also ask yourself: Has your debt grown or decreased since last year? Are you paying bills on time or waiting a little longer for money to come in? These questions are easy indicators of a healthy budget or one that needs adjustments.

Step 2: Identify Your Short, Medium, and Long-Term Goals

It is important to maintain current short, medium, and long-term goals so that you can intentionally allocate some of your monthly budget to accomplishing each of them. This helps you to successfully reach these goals with less short-term financial stress.

Budgeting for short-term goals like a new car or a “bucket list” vacation will help you avoid unnecessary credit card debt and spending beyond your means. An important, but often overlooked, short-term goal should be to establish an emergency fund to cover three to six months of living expenses.

Medium and long-term goals like saving for a home renovation project, a child’s education, or your own retirement help prioritize and define your future lifestyle.
It is important to keep goals specific and measurable. Goals like “save $1,000 a month for a down payment” are more likely to be achieved than broad goals like “save for retirement.”

Step 3: Implement Your Plan and Hold Yourself Accountable

Having the discipline to stick to the budget you created will determine whether you will be successful in reaching your financial goals.

Automating your monthly savings through a direct deposit from your paycheck to a retirement plan or an automatic transfer from checking to savings helps prioritize your savings. You should pay yourself first and then set your remaining budget. After a few paychecks with these direct deposits, your discretionary spending behavior will adjust to your budget goals as you mentally account for a smaller net paycheck.

You could also use a free online budgeting tool to track your progress. These show your spending trends across different categories so that you can identify which areas need adjustment. Regularly monitoring your progress will help you achieve financial success that fits your goals and lifestyle.

As you are tracking your progress, ask yourself what areas would be easy to cut back on. You may be surprised how much a small change can make towards your long-term savings if invested appropriately. For example, say a meal out costs you $50. You decide to eat out one less time per month, which means you save $50 per month or $600 per year into your brokerage account. You invest the additional savings and earn an average of 5% per year. Because of compounding, after 5 years you will have $3,400 of savings, after 15 years you will have $13,364, after 30 years $41,613, and after 40 years that’s $76,301 – you have saved over $75,000, just from cutting out one $50 meal per month!

Act today to create a budget and take control of your finances. Contact a Round Table Wealth Advisor to help you get started. We can help you develop a budget that is personal to your circumstances and that will help you reach your unique future goals.

Be on the lookout for our follow-up budgeting blog: 6 Budgeting Rules of Thumb. This article will cover specific values and percentages we recommend allocating to different parts of your budget like rent/mortgage payments, savings, discretionary spending, and more.

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2019-11-18T21:37:27+00:00

About the Author:

Michael Fischer is a Director, Wealth Advisor at Round Table Wealth Management. Read Michael's Biography >