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5 Steps Toward Creating an Effective Budget

Have you ever taken a look at the year-to-date total on your pay stub and wondered where all the money went? If so, you’re not alone.

A survey conducted by Gallup showed that two-thirds of Americans do not use a budget. Unfortunately, failing to track our income and expenses in a meaningful way can lead to unhealthy spending habits, reduced savings and taking on additional debt. All of these can be disastrous for your long-term plans!

Creating an e­ffective and sustainable budget is one of the best ways to help you reach your financial goals, so why do so many people fail to do it? Simply put, budgeting is often perceived as a complicated and overwhelming process. Even for those who make the effort, unrealistic goals that are impossible to meet can be discouraging. But it doesn’t have to be that way. The following are five easy guidelines that can help you create (and stick to!) a better budget.

1. Differentiate Between Needs and Wants

We have all heard the stories of “found money” by those who started carefully recording their daily expenses. Whether it’s the teacher who was spending $25 a week on Starbucks or the young couple who gave up cable and opted for streaming services, a close examination of spending habits can reveal ample opportunities to save. It is important to differentiate between needs and wants in your budget. We know needs include the necessities of life and wants are the “nice-to-haves.” The latter can be a rich source of savings once they’ve been identified and separated from the former. 

This is not to say that wants have no place in your budget. If your budget doesn’t account for those little extras, it might be harder to adhere to it. The teacher can still set aside money for those $5 coffees, but choose to have them two days a week instead of five. It may not seem like much at first, but those savings can be invested over time or used to pay off­ high-interest debt, building a solid foundation for the future. (For related reading, see: The Complete Guide to Planning a Yearly Budget: Needs vs. Wants.)

2. Include a Miscellaneous Category in Your Budget

There is no way to anticipate every expense you will encounter on a monthly or yearly basis. An unexpected car repair or family emergency can wreak havoc on your budget. Including a miscellaneous category can help mitigate the negative impact of these situations and ensure you’re prepared for them. It can also help quantify spending that you may not be capturing elsewhere, such as money for gifts or other one-time expenses.

3. Include Savings as an Expense

“Paying yourself first” is one of the most powerful strategies you can use to secure your financial future. Before paying bills or other expenses, set aside a designated amount you can a­fford to put in savings every month. You’re more likely to reach your savings goals when you treat them as an expense and commit to them as faithfully as any other component of your budget. Setting up direct deposit or automatic transfers directly into savings makes this efficient and easy.

4. Align Your Budget With Your Goals and Values

Personal finance experts and advisors agree it is critical to align your budget with your goals and values. The first step in this process is to understand what your values are and how they impact your spending. For some people, having a nice car is important, for others, getting safely from Point A to Point B is all that’s required. Being able to articulate this can help you pinpoint areas of your budget for spending and saving.

Writing down your goals and sharing them with your spouse or family can help you craft a budget that works for you. If you love taking a family vacation every year because it gives you an opportunity to relax and spend time with your children, you can reflect that goal in your budget and save for it accordingly. You will be able to enjoy yourself a lot more knowing your trip isn’t breaking the bank! (For related reading, see: How to Create a Budget With Your Spouse.)

5. Keep Your Bills and Receipts Organized

Technology has made it so much easier to track your income and expenses. Gone are the days of shoeboxes full of paper receipts and printouts; much of this record keeping can now be done online. Most banks o­ffer bill-paying features that allow you to schedule payments up to a year in advance, eliminating the possibility of late or missed payment penalties. If you tend to use cash, it’s very important to save any invoices or receipts you may need at tax time. Having this backup will also help you more accurately forecast expenses when creating your budget. There are a variety of smartphone apps that can help you organize your finances, including Mint, EveryDollar, and Wallet, just to name a few.

Budgeting on a monthly and yearly basis is a good idea for anyone, regardless of their income bracket. If you want to buy a new home, send a child to college, or are preparing for retirement, creating a good budget and sticking to it can help you realize those dreams.

Now is a great time to review the budgeting goals you set for yourself last year and figure out what worked for you and what didn’t. If you haven’t yet begun to budget, this is a great time to start!

(For more from this author, see: Take These Steps to Protect Yourself in a Divorce.)


Disclaimer: This article is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by RAA following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, RAA accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this article are not recommendations for the purchase and sale of any security.