January 2nd, 2013

How to Create a Budget

76754638Now that it’s a new year, you might be evaluating your current financial situation and setting goals for the future, such as saving for your dream vacation or simply bouncing back from spending too much during the holidays. If your resolution for 2013 is to reduce debt or increase savings, the first thing you need to do is create a budget.

A budget is like a map that directs you toward your financial goals and determines how quickly you’ll get there. Here’s how you can create a budget to keep yourself on track for long-term success:

1. You first need to make a list of all of your expenses. If you’re not sure where your money is going, try not to make purchases with cash. This way, you can review all of your transactions in Online Banking or in your monthly statement. If you prefer to use cash, make sure to save your receipts.

2. Next, separate your expenses into fixed expenses (mortgage or rent, car payments, cable, etc.) and variable expenses (groceries, gas, entertainment, etc.).

3. If the total of your monthly expenses is greater than your monthly income, you will have to make some changes. If your income is greater than your expenses, you’re already in pretty good shape, but you can still cut some of your expenses if you want to increase your excess funds.

The easiest place to start is cutting your variable expenses. Go through each of your variable expenses and think of ways you could reduce them. For example, if you’re currently spending $300 a month on groceries and dining out, you can set a monthly food budget of $200 (or a weekly food budget of $50. Smaller increments can be more manageable). You can reach this goal by planning your meals ahead of time and dining out less. It’s important to set realistic goals with plans to change your spending habits, so you can easily stick to your budget.

You might be able to make changes to your fixed expenses as well. For example, you could opt for a lower-cost cable package with fewer channels or refinance a loan to reduce your monthly payments. You can use SMCU’s refinance calculator tool to determine if refinancing will save you money.

4. Once you’ve set your budget and have determined how much you’ll be saving each month, you need to decide how you’re going to allocate your excess funds. You can pay off your debt with the highest interest rate, start saving for a down-payment on a new house, or even speak with a financial consultant to learn about investment opportunities.

Do you have budgeting or savings tips? We’d love to hear them in the comments below.

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