How to make a budget, according to money experts

Creating a budget and sticking to it is one of the first steps to becoming financially independent. But what is a budget? In general, your budget is your spending plan (for the week, the month, the year, etc.) that is based on how much money you bring in, and how much money you spend. One way to budget your money is to start with setting a goal. Read on for more tips for making a budget and sticking to it.

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“To accomplish any goal in life, it’s all about discipline,” counsels Brian Saranovitz, president of Your Retirement Advisor. “Your financial life is no different.”

In the process of building financial discipline in your life, budgeting is the very first step. In every other aspect of personal finance – from shopping to saving to investing to buying a home to retirement planning – your success will depend on your ability to create a budget… and stick to it!

“There is a magic about money,” says financial educator, Tiffany Aliche. “When money is not planned for, tracked, and kept record of, it literally disappears.” Here’s a simple, step-by-step approach to how to make a budget.

Do you want to save for a deposit on a home? Or a beach holiday? Or simply start saving each month for emergencies? Whatever your goal is, it’s wise first to visualise the results of your budget and write it down. By imagining the results and creating a mental picture, you’re much more likely to stick to your budget and achieve your desired outcome.

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Start by identifying your current, monthly, post-tax income – which is easier than it sounds: simply add up all of your sources of income. Besides your salary, don’t forget commissions and bonuses, interest, spousal or child support, dividends, freelance income, or any other cash you have flowing in. Write it all down, whether by hand or on a smartphone or computer. If you’re comfortable with a spreadsheet, then go ahead and use one to record your data.

On the same page, write down all of your monthly expenses. Make sure to include discretionary expenses (eg entertainment, travel, hobbies) as well as fixed expenses (eg housing, food, utilities, transportation, debt payments). When in doubt, it’s best to overestimate expenses.

Says Saranovitz, “It’s amazing how much your expenses add up. By simply taking the time to analyse and categorise your spending, you’ll have a much better sense of ALL your spending. Many people are surprised to find out how much more they’re spending than they thought.” Don’t overlook the little things that eat away at your money like fees and monthly subscriptions.

For utilities and other bills that vary, Aliche suggests, “To figure out an average amount of usage, take the last six to twelve months of each bill, add them up, and divide by how many months you have. Many companies will keep your old bills online, so they’re easy to find.”

Next, you’ll want to compare the totals. Are you living beyond your means? Are you spending more than you earn? Simply subtract your monthly expenses from your post-tax income. If the result is a negative number, jump to the next slide.

If the result is positive – congratulations! You are living within your means.

The first thing you should do with your excess is to set up an emergency fund, which experts say should be three to six months of salary. A quick way to accumulate emergency funds is to earmark a percentage of your pay each pay period. When you reach your goal, don’t stop adding money; the more you have saved, the better off you’ll be. You could also use the extra to:

Pay down debt.

Add to your retirement fund.

Invest it. There are a number of online tools to help you choose some low-cost investment vehicles or work with a financial advisor to maximise your allocation strategy.

Donate to your favourite charity. The world is full of people who find motivation in doing good for those less fortunate.

Spend it – that big-screen TV isn’t going to buy itself – but only when you’re satisfied with all of the above options. And make sure you shop around for the best deal.

You’re not living within your means, and you need to make changes. “Look at your discretionary expenses to identify where you can cut back your spending,” advises Saranovitz, who advises clients across the country. “While you must eat and keep the lights on and the rent paid, you can try and cut down on your non-discretionary expenses. And there’s always room to cut the discretionary expenses as well.”

Can you get a side hustle? Cut your subscription to streaming services? Sell some of the stuff sitting in your garage? Move in with a relative?

Getting a credit card or another credit card is not a solution to expenses that are greater than your income. The fees and interest on credit cards can be a savings killer. However, a balance transfer card could help cut expenses while you’re digging yourself out of a hole.

In a recent banks survey, 54 per cent of millennials reported having a budget and 73 per cent of those stick to their budget most or all of the time. Read your vision/goal at least once a week to keep yourself motivated. Budgeting is hard because we’re subjected to the world of media and advertising with shiny things and happy people using those things. “One way I’ve reduced my spending on clothing, for example, I just don’t go to the mall or retail stores as much,” reveals retirement educator Lynn Toomey. “To reduce the grocery bill, I place my order online and therefore reduce the number of impromptu (and unnecessary) items in my shopping cart. Plus, I use the time I saved navigating the grocery store for more enjoyable endeavours.”

A budget can also be a fun way to test yourself. Make it a competition with yourself. While a budget might sound stressful, it’s a great way to reduce your stress because, done properly, you’ll be living within your means. Imagine how good you’ll feel depositing the extra money into a savings account!

Plenty of online tools and smartphone apps can help you stick to a budget, including Mint and YNAB (You Need A Budget). MoneyTips.com offers free budgeting advice, while Tiffany Aliche offers templates for tracking your budget.

If you prefer the human touch, enlist the aid of an accountability partner. He or she could be your spouse, a friend, or a financial advisor who helps you stick to your budget. Many people think they can’t afford an advisor, but the value of having one is undeniable. Says Saranovitz, “Talk to a few financial advisors to see who makes you feel comfortable at a price you can afford. Most will hold an introductory meeting at no charge.”

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How often you check your progress, your spending and your savings is an individual decision. While we believe life is to be lived, we also believe that it can be lived a bit more responsibly with an eye on the future, when you’re no longer able to work in retirement. Says Toomey, “I’ve seen people who check their family’s accounts every day, which I believe borders on obsession. I feel it’s healthier to check your spending once a week, and then check on your progress against your goals once a month.” Review your cash reserve either annually or when your financial situation changes. Don’t stop budgeting once you reach retirement.