How To Create A Monthly Budget That You Can Stick To

If you’ve made it this far, you’re off to a great start. Just the mention of the B word in the title can be enough to scare off someone.

Budgeting may seem daunting. But it’s so important to your financial health, and consequently your overall health!

Let’s face it, money can be stressful and neglecting this stress can have adverse effects on your health and well-being. Eventually, confronting your financial challenges becomes necessary, and one of the most effective ways to begin is by establishing a budget that you can consistently adhere to.

The essence of budgeting is to map out your cash flow to gain a better understanding of where every dollar is going. This process helps you balance and prioritize your savings, investing and spending goals.

So, how can you create a budget and, more importantly, stick to it?

Begin by calculating your monthly income. This figure should be your monthly income after all taxes and deductions — commonly referred to as your monthly net income.

Next, you need to figure out what your monthly expenses are. This is the step that can seem daunting to people. However, it’s the cornerstone to creating an effective budget. Although delving into our spending habits might be uncomfortable, it is the only way to gain insight into our actual expenditures. So pull out those credit card and bank statements to track every dollar that has been spent.

I recommend examining at least the last six months’ worth of statements, but if you want to be extra thorough, you can examine the last 12 months. While most expenses occur monthly, some may be paid semiannually or annually, necessitating a year’s worth of data to capture the full spectrum of your expenditures.

Armed with a clear understanding of your spending profile, you can now formulate your budget and prioritize your savings and investing goals with your spending objectives.

As an illustration, if your goal is to save 20% of your income to your 401(k) but you’re currently saving only 10% then the data at your disposal empowers you to make informed decisions about which expenses you can trim, thereby freeing up cash flow to augment your savings rate.

There’s a good chance you will uncover some areas where you may be overspending. Common examples are discretionary things like shopping or dining out. This exercise serves as a valuable tool for re-evaluating your priorities and discerning what holds the utmost importance for both you and your family. Is a reduction in one of these expense categories, in order to save more, a worthwhile tradeoff? It's crucial to emphasize that if you intentionally decide to cut an expense, you should ensure an immediate increase in your savings rate to match that reduction.

This will guarantee the implementation of the intended cut; otherwise, let's face it - that saved money may likely find its way into other expenditures.

Creating a budget that you can stick to is a pivotal element in your journey toward financial independence. Once you invest the time and effort to create your budget initially, sticking to the budget becomes considerably more manageable. Additionally, there’s a plethora of tools and apps available today that can help ease the ongoing process of adhering to your budget.

For more information and tips on creating a budget that you can stick to, John O’Callaghan can be reached at john@impactfinanciallifeplanning.com.