There are three basic steps to setting a budget:
- Identify how your money is being spent
- Evaluating those expenses to see how they mesh with your financial priorities
- Cutting or tracking your ongoing expenses to see that you stay within those guidelines
Try this method to create a more reasonable plan:
Start with your after-tax income: Look at your net income to determine what you’re taking home each payday after deducting taxes and expenses for health insurance. Don’t count on money that you can’t be sure to receive, such as year-end bonuses or tax refunds.
Track expenses for two months: Sure, you could write down every purchase you make in a little notepad as you go. But an easier way is to download the last two months’ worth of bank and credit card statements.
Evaluate: Once you’ve got a good picture of where your money is going, it will likely be clear where you could (or should) be spending less. Your goal should be to reduce your spending to under 90% of your income, with the aim of saving the rest of that money for the financial objectives you deem most important.
Revise your plan if needed. Continue tracking your expenses on an ongoing basis to make sure the spending stays within the limits you’ve set. Very likely you will discover that some of the goals you set were unrealistic. It’s totally okay to ease them slightly or readjust among categories. Often it takes two or three revisions before you achieve a budget that you can really stick to.
