6 Steps to Creating a Successful (and Realistic) Budget

January 4th, 2016 by

So you want to build a budget and actually live by it? That can be tricky, but we’re here to help. In this article, we’ll give you six easy steps for creating a budget you can actually stick to.

1. Start With Reality as It Stands

The first step in making an effective budget is getting a realistic sense of your current income and expenses. Pull your records for the last three months and dissect the data. How much did you actually spend in each category? How much take-home pay did you actually receive once taxes, sick days, and bonuses were taken into account? Start with these figures rather than the abstract notions of what you ought to be spending or making.

2. Set Incremental, Realistic Goals

After you’ve done your initial review, set goals for better spending habits. However, avoid shifting your spending habits too dramatically in the short-run. If, for example, you typically spend $300 each month on groceries, it’s probably unrealistic to expect yourself to suddenly cut that to $100 a month. Try a small reduction at first and make a plan for further reductions down the line.

3. Set up Automatic Savings Transfers

The best way to make sure that your emergency fund actually receives attention is to make saving automatic. Almost every bank lets you schedule automatic, recurring transfers between your checking and savings account, so choose a reasonable amount and get automatic transfers locked in place.

4. Dump Toxic or Useless Assets

Ruthlessly cancel any unused subscriptions or memberships, then hunt for assets that may be toxic. For example, owning an old car outright may seem like a great budgeting choice, but that car may well have a higher true cost of ownership thanks to lower miles per gallon and higher maintenance costs.

5. Focus-fire Your High-interest Debt

If you’re like most people, you have debt from various sources. The tricky thing is that not all debt is created equal. With credit cards, every dollar of debt will wind up costing you an extra dollar of interest over the debt’s natural lifetime. Compare that to a car loan, which typically costs around $0.20 of interest per dollar over the loan’s lifetime.

Reducing regular spending helps free up assets to eliminate this financial hemorrhaging, but another option is to re-prioritize debt spending. For example, using creative financing for a car or home may allow you to replace expensive debt with comparatively cheap debt.

6. Use Cash for Daily Expenses

This won’t work for everyone, but many people find that working with cash makes spending feel more manageable and comprehensible. After all, if you only ever keep your budgeted cash on hand, it’s impossible to go over budget. One good approach for managing these cash transactions is the envelope system.

Remember that budgeting isn’t a once-a-year event but a continual process. Be willing to keep revising and fine-tuning as you move forward. That said, we’re confident that these six tips will help you start out strong by preparing a healthier and more sustainable budget.

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