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Budgeting Tips

An Introduction to Budgeting

Most people are familiar with the general idea of a budget, but when it comes to actually creating one, things can get a little hazy: Where to start? What to include? It can feel overwhelming, and let’s face it — making a budget is an easy task to put off. But, as with many financial tasks, it’s wise to start budgeting sooner than later to set yourself up for long-term financial success. Your future self will thank you!

Why do I need a budget?

If you’ve never had a budget before, you might wonder if it’s really necessary — after all, you’ve made it this far! But it’s always a good idea to have a budget, no matter your financial circumstances. That’s because creating a budget will help you be more aware of your spending habits, which in turn will allow you to make more informed decisions and prioritize what matters most to you.

Step 1: Think about what motivates you

Here are just a few of the many reasons you may have for making a budget:

  • Planning a major purchase, such as a house or a car
  • Paying off debt
  • Creating an emergency fund
  • Saving for college
  • Planning a wedding
  • Starting a family
  • Traveling
  • Starting a business
  • Renovating your home

Which of these things are most important to you? What else do you want to save up for that’s not listed here? Having a specific goal in mind can help you stay motivated while planning your budget — and, just as importantly, it will help you stick with it.

Step 2: Track your current spending habits

Without a clear sense of how much you’re used to spending, it’s hard to get a realistic sense of how to budget your future expenses. If the goals you set for yourself are too ambitious, you’re less likely to achieve them, and more likely to get frustrated and give up. So, before creating a new budget, take some time to get familiar with how you’re spending now.

There are many ways to track your expenses: You can keep track of your spending manually in a notebook or a spreadsheet, review your bank and credit card statements from the past few months, or download an app that will track and categorize your expenses automatically.

In addition to your daily expenses, be sure to consider any expenses that occur irregularly throughout the year, such as holidays, vacations, car repairs, insurance premiums, medical costs, and so on. It may help to go over your financial statements from the past year to identify these expenses and calculate a monthly average.

Step 3: Determine your monthly income

Fundamentally, budgeting is a matter of tracking your income and your expenses to make sure you spend less than you earn. So, it’s important to have a solid understanding of how much money you have coming in each month.

If you get paid a steady income on a regular basis, for instance on the first and third Friday of each month, you can calculate your monthly income by looking at your take-home pay. But if your income fluctuates throughout the year, for instance if you’re self-employed or work irregular hours, you will have to do some estimating. In that case, it may be helpful to look back at your banking records from the past 6 to 12 months to determine your average monthly income as the basis for your budget.

Also include any other sources of income, such as investment income, alimony or child support.

Step 4: Set your spending goals

Once you have a good idea of your monthly income and expenditures, you can start to fine-tune your spending habits. Identify areas where you’re spending more than you need to, and set a goal to redirect that money toward your goals in a more purposeful way. For instance, you may find you’re spending much more than you realized at coffee shops and restaurants. By cutting back in those areas, you could put the money you save toward savings, or toward any other financial goal that is important to you. Even a few dollars a week can add up to a substantial savings over the course of a year!

Another approach is to choose a financial goal, such as going on a family vacation or paying off a credit card, and work backwards from there to identify areas where you can save. Either way, try to be as specific as possible about how much you want to spend and save in each category.

Step 5: Automate for success

Depending on your goals, it may help to set up automated transfers into a dedicated savings account each month (or automatic payments, if you are paying off debt) so that you’re less tempted to spend those dollars somewhere else. After a while, you may find you don’t even miss it!

Step 6: Review and adjust

After you create a budget, it’s important that you follow up regularly to see how it’s working and make adjustments as needed to stay on track. Keep tracking your spending and check in each month to see how it lined up with your goals. If you overspent in some areas or had money left over, take that into account and consider adjusting your goals according to what you’ve learned.

Remember, budgeting is an ongoing process, and your needs and priorities will inevitably change over time. The good news is that once you’ve got your basic budget in place, making small adjustments is easy!

The information provided is general in nature and may not apply to your specific situation.  MCCU does not provide legal, tax, or other advice. Please consult with your own professional services provider for more information on these matters.

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