Updated February 23, 2024.
Published January 6, 2016.
Three steps to a better budget.
A budget takes commitment, but the benefits are worth it, as you gain greater control of your financial future.
Here are three easy steps to creating a better budget:
1. Discover where you are right now.
Use a spending diary to track your expenses for a month or two. As you record your expenses, look for patterns, keeping an eye out for unnecessary purchases or things you could have saved for instead of charging to a credit card.
We also have a great budgeting tool to help you quickly calulate any changes that might come up.
2. Set financial goals.
You're much more likely to achieve goals that are specific, measurable, and realistic. To get started, create goals for the short term (one year), midterm (one to four years), and long term (five or more years). Once you have your sights set on what you want to save for, divide how much you’ll need to save by how many months you want to save for. That number will be how much you should put toward that goal each month.
3. Create and manage a spending plan.
A spending plan is your blueprint for day-to-day personal finances. Start with your income. List all your income sources, including paychecks, tax refunds, bonuses, gifts, dividends, interest, pension, and Social Security. Add these all up, as you'll need the total for later.
Move on to your expenses. Use your spending diary to determine how you've been spending your money. Categorize expenses as one of these three: fixed (such as a mortgage or car payment), flexible (these costs tend to vary month to month, such as food, clothing, and utilities), and periodic (insurance and taxes). This will help you get a better grasp of your monthly cash flow.
Compare your total income with your total expenses. If your income is more than your expenses, that's good! However, if your income is less than your expenses, it's time to make some changes. That means going back to your spending diary and expense categories to see if there are any additional changes that can be made.
After you've created a spending plan, track your expenses, pay your bills on time, balance your accounts monthly, and regularly review your goals. If your budget no longer fits your goals you’ll need to make adjustments.
Celebrate the successes along the way, knowing that you're gradually creating financial freedom for yourself.
👍 Pro tip: Establish an emergency fund to cover unplanned expenses, such as paying for a flat tire or unexpected medical bill.