How to Build a Better Budget
How to Build a Better Budget
More than half of Americans say they don’t have a budget, and nearly 40% report that they live paycheck to paycheck.* While it might seem like a chore to track all your accounts and purchases, you could be taking unnecessary chances with your standard of living if you don’t.
How can you keep tabs on your spending and maintain an accurate view of where you stand financially? Online tools are a great place to start. They can make the budgeting exercise easier while helping you build confidence and personal satisfaction in the process.
“It’s really the only way to live a healthy financial life and maintain adequate retirement savings,” says Vince Maniago, a budgeting expert and group product manager for the personal finance website Mint (mint.com).
Tally Your Expenses
You have easy access to a range of personal finance and budgeting tools to smooth the process. Before using any of them, start by understanding the basics of budgeting.
As a first step, add up everything you spend in a month. You can come up with your own ledger or use Wells Fargo’s Budget Watch or mint.com. These tools pull data directly from your checking, savings, credit card and brokerage accounts. That allows you to quickly sort your spending into categories — from groceries to health care — to create a more comprehensive and accurate picture of where your money is going.
Divide your monthly spending into two categories: necessities, such as rent, groceries and utilities; and discretionary costs, such as entertainment and shopping.
Next, total up your monthly income, including paychecks, investment proceeds and any other earnings. Then subtract your monthly expenses from this figure. If you’ve got money left over, pat yourself on the back. If you’re in the red, proceed directly to the next step.
Adjust Your Spending
Categorizing your monthly expenses may lead you to rethink your spending habits. “About 90% of our users reduce discretionary spending once they see where their money is going,” Maniago says.
For example, you may find that frequent restaurant dinners are siphoning off hundreds of dollars from your end-of-month balance. Also look carefully at other spending decisions. Could the money you spend each month on premium cable channels or new clothes be put to better use elsewhere?
Purchases aren’t the only place to look for savings. Maniago suggests reviewing the interest rates on each of your credit cards and, if possible, transferring balances to lower-rate accounts. Likewise, refinancing your mortgage to take advantage of low interest rates may save you hundreds of dollars a month.
Save for Emergencies
An unexpected medical bill or house repair can quickly throw a wrench into a budgeting plan. Maniago suggests preparing for these unforeseen setbacks by building an emergency fund large enough to cover living expenses for three to six months. “It buffers your finances if a catastrophe strikes,” he says. “A job loss or car repairs can throw you completely off track if you’re not prepared to absorb those costs.”
Review your budget to see how much you can comfortably allot to an emergency fund each month. Once you have a savings target, set up automatic transfers from your paycheck to your savings account — and make sure you don’t dip into those funds to pay for a dinner out or a spontaneous weekend getaway. For instance, don’t let a destination wedding knock your budget off track. Perhaps your best friend is getting married in a vineyard three states away — or at a tropical resort an airplane ride away. If you’re hoping to attend, make sure you plan for it the way you should for any other vacation: carefully and ahead of time.
The latest American Express Spending & Saving Tracker, published in late April, estimates that 30% of Americans’ wedding guests expect to attend at least one wedding, and spend $539 per event. Here’s how the average potential costs break down:
Travel - $167
New apparel and accessories - $161
Gift for the couple - $108; (for close family members, the average goes up to $179)
When you consider that about 10% of Americans expect to attend two weddings, those numbers could easily double! Before you check ‘yes’ on those R.S.V.P. cards, take a moment to map out your personal costs to attend.
“Don’t be tempted to just put it on a credit card,” Maniago says. Estimate expenses in advance, including airfare, meals and hotel fees. If you’ll miss income from work, figure that in too.
Don’t forget to budget for the gift and any new clothes you may need. If the total is way out of range, look for ways to cut back. For example, recycle an outfit you already own, or consider spending less on the wedding gift. After all, your presence at the event will mean more to the happy couple than an expensive gift that you can’t really afford.
When you come up with a total that works for you, set up automatic paycheck deductions to build up the funds you’ll need to cover your costs. Knowing that you’ve paid for most or all of the trip in advance will make it that much more enjoyable. This guidance applies not only to weddings, but also to other milestone events like graduations, anniversary parties and baptisms, for which expenses pile up.
The work you do now to build a sustainable budget will pay dividends. You will manage your day-to-day finances better and free up financial resources to pursue long-term goals such as retiring comfortably or helping fund a child’s college education. “Everyone should know how much they spend and what they spend it on,” Maniago says. “It’s the first step toward helping shaping the financial experience you want.”
* National Foundation for Credit Counseling, “The 2012 Consumer Financial Literacy Survey,” 2012, http://www.nfcc.org/newsroom/FinancialLiteracy/files2012/FLS2012FINALREP....
*American Express Spending & Saving Tracker, “Wedding Season: What You’ll Spend to Attend,” 29 April 2013, http://amexspendsave.mediaroom.com/SpendtoAttend