2. Track the Money Coming Into Your Household and Your Spending
Once you have some practical goals in mind, it’s time to figure out how money is flowing in and out of your household. You probably already know how much you earn each month and how much you might get from other sources (e.g. child tax credits, alimony or child support, investment income). But do you know where it all goes? The best way to figure this out is simply to track your spending for a month. Whether you’re paying your bills, shopping online, or buying snacks at a convenience store, jot down every cent you spend into a single document. Doing this will give you a good idea of your overall spending habits, and you might be surprised by what you find out. To make the process even easier, use this simple money worksheet: our Monthly Expense Tracker.
3. Avoid Spending More Than You Make
Which Is Called Overspending
Overspending is a key reason why budgets fail, so all of these steps help you avoid spending more than you make. With practical goals to work towards and knowing your expenses, you’re ready to prepare your budget. Your budget must do two things. It must prevent your expenses from exceeding your income, and it must align with your practical budget goals. You already know what your expenses are because you’ve been tracking them. So here’s the first budget maker question: Are you spending more than you earn? If you are, then review that master list of expenses and cut it down until your total expenses match your total income. This will help you avoid using credit to make ends meet, which often leads to expensive debt problems.
Once your expenses don’t exceed your income, ask yourself this second question: Do your expenses align with your budget goals? For example, let’s say Rob’s practical budget goal is to save for a down payment on a house. After reviewing his expenses, he realizes that his money is going more towards spending on vacations than it is saving on a down payment. If his main goal was to have vacations, then this would align with that priority. However, Rob’s goal is actually to save for a down payment. Therefore, he adjusts his budget so that he’s spending less on vacations and saving more for his down payment. Like our hypothetical Rob, review your own budget to see if your spending makes sense for your goals, and adjust accordingly. For an easy-to-use template that also works as a budget calculator, check out this Interactive Budgeting Spreadsheet.