Creating a Monthly Budget

With a little guidance, creating a monthly budget is very easy to do. The biggest obstacle people begin with is starting. There are hundreds of ways to keep track of your monthly spending. Start a list on a plain sheet of paper, copy one from someone else, or use your computer and a program that is designed specifically for this purpose and does all the work for you.

Before you start a budget for your household, make sure that all members are on the same page. If decision makers disagree as to how money should be spent, everyone’s efforts will be for nothing. The key is to work together and communicate your individual wants and needs, as well as the needs of the household as a whole. Compromise is an essential element to success. Having a clear financial plan that everyone can agree to will minimize conflict and maximize results.

Tracking your spending is the first step to a successful budget program. Start with the known items or fixed costs you have each month. This includes your retirement, housing expense, utilities, car payments and insurance, groceries and clothing.

The best way to predict future spending is to look to the past.

Your first priority (or bill you should pay) is your retirement. Here are some eye opening statistics about retirement.

More than 3 out of every 5 Americans (61%) believe they will need at least $500,000 in accumulated assets in order to retire (Retirement Corporation of America, USA Today).

35% of retirees believe they would deplete 100% of their savings and nothing left to pass onto their heirs at death if they were to live 5 years longer than they expect to live (Society of Actuaries).

A 30 year old saving $100 at the beginning of every month and earning 7% in a tax-deferred account until the age of 60 will accumulate nearly 4 times as much money as that of a 45 year old saving the same amount of money and earning the same interest (BTN Research).

The median 401(K) account balance for a person nearing retirement (i.e. a baby boomer) is only $60,000 (Center for Retirement Research).

After monthly household and fixed expenses are paid, you should start saving for an emergency. Three main causes for foreclosures are loss of job, divorce, and medical emergencies. Having at least 3 months in reserves is recommended by experts.

Finally, save money for entertainment costs and for non household purchases. Instead of putting that new TV on your credit card, save up for a few months and pay cash. Or do you really need a new TV?

The most important thing to do is be flexible. If your budget doesn’t work the first month, adjust it accordingly and try again in month two, or three, or even month four.

As I said in a previous post (Habits Not Numbers) it is not about the dollar amount but rather the habits. As time goes on you will need to make less and less changes and will be able to better predict future expenses.