Creating a budget is a simple endeavor once the initial, somewhat time-consuming evaluation of income vs. expenses is complete. The greater challenge is sticking to it. Since budgeting is only as successful as its implementation, we would like to offer some practical suggestions for coming up with a budget that is strict enough to help you avoid sinking back into debt, while flexible enough to keep working throughout your life.
Tip #1: Evaluate income vs. expenditures
Review your bank statements, credit card statements and bills from the past year. Discuss with your family and come up with an honest evaluation of income vs. spending. Create a spreadsheet that includes the following:
- Monthly net income — amount you actually bring home after taxes, insurance deductions, and such
- Monthly expenses that are fixed — includes mortgage or rent, other loan payments, credit card minimums, utility bills… anything that must be paid or risk damage your credit rating
- Optional monthly expenses — includes restaurants, entertainment and anything else you could survive without
Tip #2: Create a separate spending account
Most people have one checking and one savings account, with their pay going into checking and payments for everything from the mortgage to fast food coming out. In order to make sure you have the necessities covered every month, consider adding a second checking account. This will be where the money goes that is left over after your fixed expenses are met and the amount you’ve agreed to save is deposited into savings each month. Whatever is left goes into the second checking for optional expenses. Don’t exceed it if you don’t want to wind up back in debt.
Tip #3: Reevaluate your budget regularly
Things change, for better and worse. A promotion can increase income significantly. Illness can lead to high medical bills. For a budget to be workable, it must be flexible, so that you can afford the unexpected. Be prepared to restructure your budget when a major event changes your fortunes. Even if nothing significant occurs, it is a good practice to review your budget every four months or so, to see if you can make improvements.
For example, you may find your optional account is so small that you feel deprived. This is not the time to tap into your fixed account, but rather to look for opportunities to reduce your fixed expenses. Maybe you can join a carpool and reduce what you spend on gas every week. Perhaps your mortgage can be refinanced at a better rate. Or maybe it’s time for your employed older teen to kick in some rent.
The key to budgeting success is flexibility. Always seek opportunities to reduce expenditures and increase income then adjust your budget accordingly. Isolating fixed from optional expenses —without neglecting savings — lets you know just what you can and cannot afford each month. Spend within your means, and you won’t need the services of a consumer bankruptcy lawyer again anytime soon.