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Life’s big splurges – like vacations and weddings – require serious planning. But because they’re supposed to be fun, people don’t mind.
But how do we make sure the big expenses are affordable? By tracking the little everyday ones and saving properly. Not so fun, and probably a big part of why one of the most popular New Year’s resolutions – learning to create and stick to a budget – often fails.
In the video below, Money Talks News founder Stacy Johnson explains how to use goal-setting to convert budgeting from enemy to friend. Check it out, and then read on for more.
Ready to make 2012 the year you built a budget that works? Here’s how to get started…
1. Make a goal you care about.
If you want to budget better because you have a vague notion that maybe it’s a good idea and it might help, you’ll probably fail. Think realistic, but think big – and specific.
This is the most important step, and it’s all about narrowing the distance in your mind between what you have and what you want. If you want something bad enough, you’ll find a way to get it. The problem comes when what we want now – like seeing a movie, or eating out – supersedes what we’re trying to achieve later: our long-term goals. The best way to keep that from happening? Have a specific goal that you’ll achieve by a specific date. And make sure that goal is something you desperately want.
So what’s a good, specific goal? How about this: “By Jan. 1, 2013, I will have $25,000 saved, so I can make a 20 percent down payment on a house that costs $125,000.” It’s specific, it’s got an end date, it’s trackable, and most important: If you really want a place of your own, it’s compelling.
The idea is to make the math look more like addition – you’re going to get a big reward! – than subtraction, where every dollar seems like a sacrifice. That’s one reason why personal finance pros prefer the term “spending plan” to “budget.” A “budget” sounds like a diet – all pain. This is about gain, not pain.
2. Use technology to automate and simplify the process.
If you read our story on Monday, Money Hacks 2012 – 8 Shortcuts to Getting Richer, you know one of the simplest ways to save more is to harness tech.
You’ll still have to do some thinking, but with free online resources such as Mint.com or Bundle, you can automatically track and categorize your spending and see the big financial picture every day without tedious calculations. If you prefer the old-fashioned approach, no worries: Use our free budgeting spreadsheets. Whatever works.
Well, that takes care of motivation and math. What next?
3. Figure out your net income.
A spending plan obviously has to start with the maximum amount you can spend. You know your gross income – what you make before mandatory withdrawals for federal taxes, state and local taxes, Medicare, and Social Security. You might also have optional deductions for stuff like health insurance and union dues.
What’s left is what you really have to work with: your net income. This is probably between 20 and 30 percent less than your gross income, and unless you want your budget broken from the get-go, it’s the number to start with. But don’t forget to factor in any other sources of income: alimony, child support, rent, interest, bonuses, overtime, and so on. Estimate if you have to; you can tweak it later. A good spending plan is always a work-in-progress.
4. Track your spending.
Before you know what you can afford and where you might find the money to reach your goal, you have to see where your money’s going. It doesn’t matter how you do it – from writing it down daily to using an app or site like Mint.com. The key is to see where your money is going so you can start setting targets. And don’t forget to track your cash.
Is it a pain to track your expenses? If you’ve ever tried it, you know it’s not physically difficult, especially with the latest tech tools at your fingertips. What makes it a challenge is that we’re often afraid of what we’ll find out – that we need to spend less now to achieve more later. Not to worry. Just give it a few weeks. Once you see how tracking your expenses will help you get what you want, you’ll be fired up.
5. Fine-tune the plan and hunt for savings.
Once everything’s laid out in front of you, the magic begins. If your goal is one year away, divide up your savings into 12 monthly amounts and start forging the path to getting there.
Where will your goal money come from? Whatever you spend money on, you can probably save on. Look at where your money’s going and see if you can cut back, without sacrificing your quality of life. Can you cut your monthly grocery bill by using coupons? Pack a cheaper lunch for work instead of eating out? Cut out a premium cable or phone plan? Buy more stuff used instead of new?
If doing any of these things will make you unhappy, don’t do them. But there are tons of places to save, and many don’t require sacrifice – just forethought. Check out our Most Popular Posts of 2011, all of which are about saving money and finding more satisfaction in life. Then check out some of these:
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