Personal Finance 101: 5 Steps to Become the Boss of Your Budget

By Brittany Mollica

One of the most common New Year’s resolutions is to create (and stick to) a budget. Now that we’re a couple months into 2019, it’s quite likely you have forgotten about this goal or given up on it altogether. Trust me, I know it’s not fun to think about how much money you’ve spent on lattes this month.

But I’m here to show you that budgeting does not have to be difficult or time-consuming. It can actually be very comforting to know that you have a plan for your money, especially if that includes a regular Starbucks run! To help you get started, here are five simple steps for creating a basic budget:

1. Assess your current cash flow – Show yourself the money!

Before you can create a budget, you need to understand your current cash flow. We would recommend categorizing and tracking your income and expenses over several months. This can be done manually on a spreadsheet or through a budgeting app on your computer or phone (We highly recommend using an app for this tedious part of the process. For Hilltop clients, our Wealth Portal offers a great budgeting tool that will automatically import and categorize your bank account and credit card transactions).

You will likely want to use the following broad categories, but feel free to adjust this and create your own categories as needed:

• Savings (retirement savings, emergency fund savings)

• Housing (mortgage or rent, homeowners insurance, property taxes)

• Utilities (heat, electricity, cell phone, wifi)

• Health Care (health insurance, dental insurance prescriptions, eyeglasses)

• Debt (student loans, car payments)

• Food & Groceries (dining out, grocery shopping)

• Personal Care (hair care, personal hygiene, laundry, clothing, gym membership)

• Entertainment (vacation, concerts, movie tickets)

• Charitable giving

As you start to understand what you’re spending in each category, you’ll better understand which expenses are simply wants versus needs. 

2. Pay yourself first – Don’t just survive. Thrive!

The next step is to decide how much you want to save each month. You’ll need to include several types of savings:

• emergency fund (for more info on emergency funds, see this blog post)

• shorter-term goals (e.g. new home or big vacation)

• retirement plan contributions

Decide how much you want to save each month (try to save at least 10-15% of your income) and then set aside those savings before you cover any bills or regular expenses. This technique – called “paying yourself first” – is the most certain method to build wealth over time.

3. Identify categories where you regularly overspend – “What is your greatest weakness?”

Next, review your spending categories as percentages of your monthly income. If these percentages don’t line up with your personal priorities, you may want to reallocate the spending that’s left after you’ve set aside your savings.

Set a revised weekly or monthly limit for each category and think about the individual expenses that you can reduce to help you reach your overall spending goal. For the next few months, set a weekly appointment for yourself to monitor your spending relative to that goal. (Again, an app will do a lot of this work for you!)

4. Be flexible – Stay in control, but go with the flow.

While you’re monitoring your spending, remember to be flexible! It’s okay if you go over-budget for a certain category – this is just part of the process. However, if you find that you’re always above your limit for dining out but below your limit for personal care, you can simply adjust your budget between the two categories.

You will also find that even after you’ve established a reasonable budget, you’ll need to review and tweak it as your life changes.

5. Celebrate your success – You’re the boss of your budget!

Before long, you’ll realize that your savings accounts are growing, you’re spending less on things that you don’t truly care about, and you’re feeling more confident about your finances in general. That alone is a huge success, and you are setting yourself up for a great financial future – without necessarily having to sacrifice your favorite coffee drinks. 

*If you would like to discuss how your budget fits into your larger financial plan, reach out to us.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.