With a strong budget, you make the most of the resources you have. You can be certain that you are steadily working toward your most important goals, and that every dollar you earn is going exactly where it needs to go.
Over the past few weeks, we talked about how to get started on your own budget, by recording your current income and expenses. We also went over steps you can take to set and prioritize your goals.
This week, we’re going to combine your financial situation and your goals into a workable budget.
First, simply add your goals to your list of expenses, and subtract that total amount from your income. Now you know what you need to cut from your expenses in order to make room for your goals.
If that figure is a little overwhelming for you, try to be patient. Small cuts from the different parts of your budget add up quickly.
Next, go through your budget, line by line, and brainstorm about different things you can do to save with each expense. You don’t have to commit to those ideas now — just recognize them as options and try to calculate out your savings.
Do you really need it? This is the basic question to ask yourself as you go through the different areas of your budget. It could be that you consistently choose a more expensive version of an item or service when a cheaper alternative exists. Figure out why. Understanding the reasons behind your habits can help you adjust your behavior to fit your overall needs.
Make cuts to specific categories. Pay attention to your budget categories, especially the categories where you know you’re most likely to overspend. If your expenses are high in a subcategory, like DVDs in entertainment, try isolating that subcategory in your budget.
When you’re making cuts in these areas, try to translate the dollar figures into spending behavior — for example, how many times per week you purchase a particular item. Instead of trying to go without, you can simply slow down your spending, so that you’re left with a lower monthly figure. You can then reroute that extra savings toward your goals.
Stay realistic. It doesn’t help to come up with budget targets and then ignore them because they were too strict to begin with. Make small cuts at first, and then gradually increase them.
Take a closer look at your fixed expenses. While it can seem like these expenses won’t budge, there are always savings to be found.
While your minimum credit card payments can be considered a fixed expense, those minimums will go down drastically if large payments are made. You can save on utilities by talking to your family about shutting down appliances when they’re not in use, and buying energy efficient appliances. With cable and cell phone plans, shop for better deals once your service contracts have ended.
Adjust your withholding. If you get a large tax refund every year, you’re withholding more income for taxes than you need to. If you withhold less, you’ll free up some income, which can be used for your goals. Just be careful — you don’t want to end up owing taxes. Talk to a tax professional or visit IRS.gov’s withholding calculator online to check your numbers.
Michael Camacho is the president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.