#WealthforLife Wednesdays: How to Create a Realistic Budget

When selecting our Financial Fitness winners each month I always ask our subjects,” Do you have a budget?” The replies vary but they’re usually followed by grunts and groans about how restrictive budgets are. And if they have created one, our subjects share that they often drift from it within a month’s time.

Developing a budget is an essential part of your wealth-building plan. To some degree, they should be restrictive. There are sacrifices that you must make if you are serious about really managing your money and reaching your financial goals. Creating a budget allows you to see how much money you have coming in and going out and helps prevent overspending. If you find yourself halfway through a pay period but clueless about where your money has gone, it’s time to sit down and create a budget.

Dawn Brown, senior financial advisor for Altfest Personal Wealth Management, recommends these steps in preparing your budget:

Step 1: Gather All Financial Documents:

Don’t wing it. Take the time to compile your pay stubs, bank statements, investment accounts, bills, etc. This is an essential step in creating a realistic budget and will help you figure out your monthly averages.

Step 2: Determine Your Income:

Record all incoming money. This includes your salary; any bonuses or commissions you expect to receive; additional funds such as freelance work, for example; interest; child support; and any other sources of income.

Step 3: Estimate Fixed Expenses:

Your fixed expenses include taxes and bills. Fixed bills include mortgage/rent, utilities, insurance, and credit card/debt payments such as student loans. Also allow for necessities such as groceries, gas, car maintenance, and medical expenses. Your assembled financial documents should help you determine what to budget for these. As for taxes, there are tons of free estimator calculators for you to choose from online to help you estimate how much you may owe. Check out H&R Blocks tax estimator calculator or TaxCaster from Turbo Tax.

Brown advises that you also include your monthly savings goal as part of your fixed expenses.

“It is critical that you get in the habit of paying yourself first. Even a few dollars each month helps build your savings,” she says.

If you’re spending more than you’re bringing in, identify areas where you can make cuts and keep reworking the numbers. Perhaps it’s moving to a cheaper apartment, switching to a lower cell phone plan, or cutting out cable.

4. Estimate Discretionary Expenses:

Any money left over after paying all your fixed expenses is considered discretionary money. If you haven’t already included it as a fixed item, you should now determine how much you will apply toward savings. For example, let’s say after you pay all of your fixed expenses you have $200 in discretionary funds. Determine how much of that $200 you will designate for savings. Aim to save at least 10%, but if you can save more then do so. If you must start at less than 10%, just commit to saving something starting now.

Subtracting your savings goal will determine how much you can put aside for discretionary expenses such as entertainment, eating out, travel, or other savings goals you may have (such as paying for college, buying new furniture, etc.) Creating a line item for these expenses will prevent you from overspending and dipping into your savings.

Make your own monthly budget using the worksheet provided by Altfest Personal Wealth Management. Remember, aim to spend less than you earn and pay yourself first!

Next week we’ll share tips on how to automate your savings and explore digital apps to help you track your spending.

Need a boost? Enter our Financial Fitness Contest for a chance to win $2,000 and a one-hour session with a certified financial planner: http://bit.ly/12FitSo