5 Steps To Creating a Budget That Sticks

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A topic that often garners a love-hate relationship: creating and managing a budget.

Like Dave Ramsey once said, there are two types of people in a marriage: planners and free spirits. Planners love budgets, while free spirits prefer to live life without constraints. But with nearly 78% of American workers living paycheck to paycheck, it’s no surprise they need help.

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So, why are so many Americans living paycheck to paycheck despite having what should be sustainable incomes? Let’s explore the importance of budgeting and the steps to create a budget that sticks.

Step 1: Assess Your Financial Situation

Before putting pen to paper or diving headfirst into spreadsheets, take a moment for self-reflection. Consider your financial situation without crunching the numbers just yet. Are you part of the 78% living paycheck to paycheck? Do you lack a financial cushion? Are you swimming in bills? Or maybe you know that you could be doing better.

Think of it this way: Imagine your income as a pot of boiling pasta. When you strain it, what’s left represents your net income after taxes. If your financial strainer has a gaping hole, only a few “noodles” will remain. The goal is to plug that hole and keep more noodles — i.e., income — for yourself. It’s a simple analogy, but it underscores the idea that even with a good income, you might still live paycheck to paycheck.

Step 2: Set Clear Financial Goals

Now that you have a clearer financial picture, it’s time to set goals. Goals provide you with something to strive for, both short-term and long-term. Split your goals into three categories:

• Short-term goals (achieved within the next 12 months): Pay off a car, eliminate personal loans or tackle smaller debts.

• Medium-term goals (2 to 5 years): Pay off consumer debts, including credit cards or student loans.

• Long-term goals (5 years and beyond): Visualize your financial future. What do you want to achieve? Homeownership, early retirement or starting a business?

Ensure your goals are clear, defined, realistic and achievable. It’s crucial to set the stage for your financial journey effectively.

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Step 3: Create Your Budget

There are various methods to create a budget, from pen and paper to budgeting apps. Initially, consider starting with a manual approach to better understand your expenses. Write down every income source and expense, no matter how small.

This process helps you grasp the intricacies of your spending habits, including those small, easy-to-overlook transactions like your $5 Dollar General purchase because you didn’t buy enough groceries at the start of the week.

There are several budgeting techniques, including:

• Zero-Based Budget: Allocate every dollar of your income to specific categories, ensuring you reach zero monthly. This approach can be time-consuming but effective for meticulous planners.

• Envelope System: Allocate physical cash into envelopes designated for different spending categories, ensuring you spend only what’s in the envelope. This method can be restrictive and less suitable for modern digital transactions.

• 50/30/20 General Budget: Allocate 50% of your income to needs (e.g., housing, groceries), 30% to wants (e.g., entertainment) and 20% to savings (e.g., retirement and emergency fund).

Choose the method that suits your personality and financial situation best. The key is to find a budgeting strategy that you can maintain over the long term.

Step 4: Manage Your Expenses

To fine-tune your budget, scrutinize your expenses. Are there areas where you can cut back or reallocate funds? Forbes suggests budgeting ranges for various categories:

• Housing: 25-35%

• Transportation: 5-15%

• Food (groceries and dining out): 10-15%

• Personal care (clothing): 5-10%

• Health care (insurance premiums): 10-15%

• Loan repayment (excluding car payments): 7-15%

• Utilities: 4-7%

• Entertainment: 1-5%

Remember to prioritize saving by allocating a portion of your income before budgeting for other expenses. Pay yourself first.

Step 5: Stick to Your Budget

The hardest part of budgeting is sticking to it. It’s easy to recognize the need for change, but executing it consistently is the real challenge. Use budgeting apps or electronic tools to monitor your spending throughout the month. Make budgeting a team effort by involving your spouse and treating it as a regular discussion or even a date night activity. The key is discipline and consistency.

Budgeting may not be the most exciting topic, but it’s a powerful tool that can transform your financial future. By creating a budget tailored to your unique circumstances, setting clear goals and diligently sticking to your plan, you can escape the paycheck-to-paycheck cycle and achieve your financial dreams.

Remember, it’s not about restricting your life but about taking control and gaining the financial freedom to enjoy it to the fullest. So, start your budgeting journey today and watch as your financial life takes a turn for the better.

Editor’s note: The author, Connor Bauserman, is a senior financial advisor with Harbour Investments, Inc.

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