Spring into Household Budgeting

budgets

Spring is in the air! As you’re wrapping up your tax filing for 2016, now is a natural time to either create a new budget or refresh your existing budget. Here’s how:

Organize your data. Gather all your bank, credit card and income statements for the last several months to a year. Calculate how much income versus spending you have for each of these months.

Using software can make these budgeting steps easier. There are several online budget applications available for free, including Mint.com and Personal Capital, as well as paid software such as Quicken and You Need a Budget (YNAB).

Sort your expenditures. Break down your expenses for each month into categories, such as mortgage or rent, utilities, groceries, vehicle, insurance, household goods, restaurants and entertainment. As you go through the categories, you will be able to distinguish those that are set costs, such as mortgage, insurance and utility payments. You’ll also see those that are flexible, such as restaurants and entertainment.

This is a revealing part of the budget exercise. You may not have realized how much you are spending at coffee shops, for example, until you lay out your spending in a budget. If you notice a particular kind of spending that is unnecessary, you could create a subcategory to track it. For example, track snacks and junk food within your grocery category, or track parking tickets within your vehicle category.

Set financial priorities. Now that you have clear categories for how you’ve spent your money, write down a list of your financial priorities. These could be things like building a savings account for emergency expenses, growing your retirement savings, paying down debt, or saving for your children’s education. If you’re not spending enough on your priorities, resolve to shift more of your spending from the flexible categories.

Changing spending habits can be hard to do all at once and it’s easy to slide back into old habits. Using a budget keeps you honest with yourself and allows you to gradually shift your spending to better reflect your priorities.

Create your cushion. In addition to building up an emergency fund to cover three to six months of expenses, consider creating a month-to-month cushion. After you’ve set your budget, set aside a small percentage of your monthly income for your “cushion.” Your cushion is there to give you some leeway if you make mistakes and go over budget over the course of the month. Think of it as your margin of error.

If you get to the end of the month without going over budget, give yourself a small reward or at least a pat on the back. Rewarding yourself will help reinforce positive financial habits in the months to come.