You don’t have to cut out coffee, movies or dining out to radically improve your savings and personal finances. You’ll probably need to cut back on these things, but you don’t have to cut them out.
The trick is tracking what you save after you create a budget, not setting arbitrary limits to live with before you start your budget plan.
Living on $60,000 a year might not allow you to save for a home, pay off debt or prepare for retirement, depending on where you live and what your financial goals are. However, creating a personal or household budget will help you control spending and increase the chances you can save for a home, baby, retirement, vacation or clearing those credit cards.
It’s all about tracking — if you don’t keep track of discretionary spending, your debt can rise to unsustainable levels, and you might find yourself back home living with mom and dad.
Create a Budget Document
Use a spreadsheet, such as Microsoft Excel. List your income sources, including salary, wages, tips, gifts, sales of assets, dividends and interest, down the column on the left side of the page. List your expenses by category underneath the column of income sources, on the left side of the page.
Divide expenses into fixed and variable categories. Fixed expense won’t change each month; they include items such as rent or a car payment. Groceries are variable expenses, which change from month to month, but are a regular expense, so you might consider this a fixe expense and estimate an average amount each month.
Create Monthly Budget Estimates
Create a column titled, “Estimated Monthly” after the column containing your list of expenses and income. Create a column next to this titled, “Actual Monthly,” which averages your monthly expenses as they occur each month to show you how you are doing during the year.
Look for Sample Budgets
Visit our sister website, MyFIREFacts for a sample personal budget or family budget. Starting in the column next to the one you filled in with income and expenses, enter the months of the year, from left to right. Gather your credit card receipts, checkbook, bank statements and any other pertinent financial records from the previous year to guide you.
Enter your Budget Numbers
Enter your estimated annual income and fixed, or regular, expense numbers into your budget into your “Estimated Monthly” column. Over-budget for groceries, recommends radio financial adviser Dave Ramsey. Use your previous year’s spending levels to determine your other expense number.
Divide your Income by 12
Calculate your monthly take-home pay and divide it by 12 to determine how much you have to spend or save each month. Depending on your state and federal income tax rates and deductions, you might pay anywhere from 25 percent to 35 percent in taxes, giving you between $3,250 and $3,750 per month for expenses and savings.
Subtracting 30 percent for housing and debt and 3 percent for a 401(k) match, you would have between $2,175 and $2,500 to pay the rest of your bills each month and set aside savings. Enter your discretionary expenses into your budget once you know your take-home pay. Discretionary payments include such items as dining out, entertainment or saving for a vacation or home down payment.
Add your 401(k) match to your income and expense categories. If your 401K match is 3 percent, budget $150 toward retirement savings each month in your expense column and add $150 each month as income.
Think About Adding Ratios
Calculate spending ratios to guide your budget. Spending ratio advice varies widely. For many years, conventional wisdom dictated you limit your housing expense to approximately 25 percent of your pre-tax income.
This would be $1,400 per month for rent or mortgage. Government housing agency Ginnie Mae suggests a person with a $60,000 annual salary and no credit card, car loan or other debt limit his mortgage payment to between $1,450 and $1,650, depending on the loan type.
Another option is to limit your total debt payments, including housing, credit cards, car loans and student loans, to 30 percent of your gross income, recommends Forth Worth, Texas financial adviser, Kim Dingum. This would give you approximately $1,500 per month for housing and to pay down your debts. Assuming 30 percent total taxes, 30 percent debt reduction and 3 percent 401k match, you will have $1,850 to pay the rest of your expenses and set aside savings.
Run your Budget Numbers
Subtract your estimated budgeted expenses from your net income. Adjust your variable expenses if your estimated expenses are higher than your income. Examine fixed expenses you might be able to reduce, such as switching phone or Internet service or raising the deductible on your auto or renter’s insurance.
Decide How to Spend Any Extra Money
Apply excess income you project you will have to your desired goals. Budget monthly savings for retirement contributions, emergency fund, saving for a vacation or home, or use excess money for debt reduction. Decrease your monthly interest expense if you plan to reduce your debt with excess savings each month.
Update your Monthly Budget
Enter your income and expenses into your budget each month as they occur. Include small, daily purchases, such as coffee, magazines, lunch and any other purchase, which can add up to hundreds of dollars each month and thousands each year. Check your average monthly spending against your budgeted monthly totals each month and your projected annual totals against your budgeted totals.
Be Careful Recording Credit Numbers
Don’t double count expenses. If you put $300 on your credit card for groceries in April, don’t enter that as a $300 grocery expense in April, then a $300 credit card payment amount in May, since you’ve already recorded the expense in April.
CNNMoney.com: The Ideal Budget