How to create a realistic budget

Every once in a while, it’s helpful to revisit the basics and touch on the fundamentals of smart money management. This week, we’re focusing on the cornerstone of financial stability: creating a budget.

Separate wants and needs

Believe it or not, I suggest you start with one piece of paper to write down every line item of your new budget. There’s something about actually writing it down that helps you mentally take stock of where your hard-earned money is going each month.

Start with your needs: the bills you have to pay each month or you’ll incur a penalty. This includes things like your mortgage, utilities and credit card bills, as well as other things like cable and phone for which you are likely under a service contract.

Everything else falls under the wants category. This is where it gets challenging. For example, you may say, my child needs shoes every other month so this is a need. If it’s not something you have to buy without penalty though, it’s important to keep it as a want because you may need to weigh your options later.

Bake in some “quality of life” budgets like eating at a restaurant, having a date night, personal spending, etc. It’s important to think of everything you possibly can. Even if it seems small, like a Starbucks stop once per week, add it to your list of monthly wants.

Make decisions on your wants

Once you are done with your exercise, subtract all needs and wants from your monthly income and see what remains. If you have credit card debt, consider using any excess to pay that off as quickly as possible. Once credit cards are paid off, you can then use those funds for fun ‘quality of life’ purchases. Even if it takes you a long time to pay off credit, remember that the goal is to spend money enjoying your life in the present, not paying for things you did in the past.

If you find yourself in the red after your calculations, it’s time to take a fine toothed comb to your wants list. Where can, or should, you cut back to balance your budget to $0?

Expect the unexpected

I always tell people, if possible, have a small amount handy, even if it’s $40 or so, for unanticipated expenses. For example, a relative coming into town without notice and you’re hosting them for dinner. This will help you to avoid dipping back into debt, and if you don’t spend it, it becomes a nice little savings account for you!

Chip away at lofty expenses

Most families can’t afford to pay for bigger ticket items like a vacation, the holidays or a home renovation up front. But there’s still a way to weave those longer terms expenses into your monthly plan.

For example, if you’d like to take a spring break trip next March, and you estimate it will cost around $2,000, divide that amount by the five month (November-March) time period until spring break. Then add that amount ($400 per month) to your monthly budget.

By the time your trip rolls around, you’ll have the cash in hand to go. If you can’t save that much each month, you’ll need to consider bumping the trip back or taking a more affordable vacation.

It’s also recommended that you have at least $1,000 in savings at all times to truly break the cycle of debt. Otherwise things can come up like medical bills that put you right back at square one. Next week, I’ll cover some tips on building up your savings quickly so you can better stick to your budget each month.

For now, if you follow this advice, you’ve already done the hardest part. Making monthly budget decisions is a challenging task, but it’s the first step to achieving a state of intentional spending that will put your family on a path to financial peace of mind.

This story was originally published October 5, 2017 at 12:27 PM with the headline "How to create a realistic budget."