3 Reasons to Make a Budget, and 7 Step-by-Step Tips

A budget in hand means control of your life. It isn’t any more complicated than that.

Budgets are maps to get you to where you want to go. Reach your goal. Score a victory over oppressive money worries. There is so much in life that we have no control over whatsoever, but spending isn’t one of them.

Think of the financial adviser as your coach. Your budget is the game plan. The coach’s chalk marks determine how to reach the finish. The budget is the blackboard on which your strengths (assets) and weakness (debts) are outlined. Financial problems dissolve when the lights are turned on. And that is the role of your adviser. Light switcher.  

1. Financial independence. A working budget means you can safely predict your independence from debt collectors, garnishment of wages, and all the other assorted debacles that attend indebtedness.

2. Freedom. Free from fear of financial catastrophe. Free from the public embarrassment of a declined card or returned check (and returned check fees). Free to make choices about how you spend your money, and when and where and never be stressed by nagging doubt.

3. Organization. The budget organizes your life, present and future. A budget is the only way to know where you are, financially speaking. A budget lets you make some very meaningful predictions about a future where you, not debt, are in control.

How to make a budget

Budgets work. Budgets provide immediate benefit even if they are ugly critters at first sight. Best of all, a budget need not be any more complicated than a few simple headings.

1. Review spending. Track spending for at least one month. If you use cash, take notes (or use an app) to see where you spend. Chase down every dollar you can think of. Look at your bank and credit card statements, and use their online budgeting tools to figure out what you spend. If you’re spending money on bank fees or interest, can you change some behaviors to eliminate those fees?

2. Create categories. Be specific. Identify each category as essential, important or discretionary. Define priorities.

• Mortgage
• Homeowners insurance and/or property taxes if not included in mortgage
• Savings
• Auto loan
• Other debt
• Auto insurance
• Fuel
• Insurance – health, dental, life
• Healthcare out-of-pocket – co-pays, prescriptions
• Groceries
• Entertainment
• Grooming – haircuts, nails
• Clothing
• Utilities – gas, electric, water, trash/sewer, landline, internet, cell phone
• Childcare
• Memberships – gym
• Household – pest control, housekeeping, yard maintenance, security system

Mint.com is a helpful budgeting app – time consuming to set up but then almost effortless. Enable email alerts as you get used to your new spending limits.

3. Curtail. Careful review of your spending puts a spotlight on financial waste. Only you can say what constitutes waste, but figure out where you can cut back. Human nature makes us want to avoid knowing exactly how/why we spend, but we must if we are to take control of our financial futures.

4. Stick to it. Don’t go over budget. Pay with cash if you need barriers to overspending. This may be the hardest of all to accomplish. Self-discipline is essential to the success of a budget, as it is of pretty much anything else worthwhile in life.

5. Buddy up. Have an accountability partner. A spouse, parent, friend, financial counselor – someone you can check in with regularly to discuss progress, setbacks and questions. Lots of people know what it’s like to tighten purse strings. No one has to knuckle through it alone.

6. Savings. Be sure to budget savings, no matter how modest, and make it automatic. Some people call this “tithing yourself.” The ultimate end game is a good retirement of course, but you will also want to have vacation dollars to spend and a sufficient emergency fund.

7. Prioritize. Prioritize. Prioritize. What are the essentials? What can be eliminated or vastly reduced in size? Sometimes radical change is required: downsize the house and car, for instance. Other times we need only ask ourselves on a daily basis, “Do I have to spend this money? Does this expenditure get me closer to my goal or farther from it?”

No time like the present

Any time is good for budget making. But as far as the calendar goes, perhaps there is no better moment to sit and draw up the budget columns than now, as the New Year begins. Resolutions go with the season. If you have already asked to consult with a financial adviser, you are most of the way to your goal. The rest is attention to details. Budgets are a measure of our hopes and goals. The current Secretary of the Treasury, Lew Jacobs, said “The budget is not just a collection of numbers, but an expression of our values and aspirations.”