A budget can give you a clear path to live within your means and reach your money goals — and while it's a straightforward concept, there are some strategic steps you can take to set one up (and keep at it.)
Many people think of budgeting as setting limits on your spending, but it's more helpful to think of a budget as a map with clear directions detailing how you can reach your financial destination. "Budgeting gives you the freedom to say 'yes' to things that matter and 'no' to things that don't help you reach your goals," says Whitney Hansen, a money coach based in Boise, ID. "Most people view budgets as restrictive, but they are actually empowering."
Learning to live within a budget can require a little shift in thinking because "by saying yes to something you are saying no to something else," she acknowledges. But instead of focusing on all the things you can't buy, it's better to focus on what you are saying yes to, Hansen suggests." By getting your finances in order, you are saying yes to financial security, peace of mind and things that are directly in line with your values," she says. "Sometimes we just have to remind ourselves of that."
The first step in creating a realistic budget is having a clear picture of your income and how you spend it. A spreadsheet (digital or analog) is a handy tool for accomplishing this. First, add up your monthly take-home income from all your sources — regular salary, freelance, side hustle or some combination — and calculate your monthly average.
Once you know what income you have to draw from, you can start to track your spending. Use a pen and paper (get creative with a bullet journal) or a site or an app you trust to sort your spending into “buckets” such as mortgage or rent, utilities, car payment, internet, insurance, food, gas, entertainment and so on. Breaking down your spending into categories can help you figure out where you may be able to cut back.
To identify spending trends, you may want to try this exercise, Hansen suggests: Print the last 30 days of transactions from all your accounts. Write down three categories in which you either overspend or aren’t sure how much you spend, such as “eating out” or “online subscriptions”. Choose a highlighter in a different color for each of these three categories and then go through every transaction highlighting those that apply and adding up the totals in each group.
“This is incredibly eye-opening,” Hansen says, because it allows you to see if there is a service you can cancel, for example, or any charges you’ve forgotten that you have been paying. If you’re struggling to figure out where you can cut spending, says Chicago-based money coach Tim Jordan, try asking yourself questions such as “How much time will I spend on this?” and “How much fun do I have doing this?” “If the answer is ‘meh,’ it’s probably fine to stop spending money on it,” Jordan says.
Budgeting gives you the freedom to say "yes" to things that matter and "no" to things that don’t.
Once you've determined what you truly can spend on, it's a good time to consider both your short-term and long-term goals. Short-term goals — buying a new car or paying off credit card debt — might be something you hope to achieve within the next year or so. Long-term goals stretch further into the future: saving for a home, college tuition or a retirement fund, for instance. It helps to do some research to estimate how much you'll need for each of these goals and to plot out a timeline if that applies.
Here's one example: After doing their homework on a long-term goal of buying a home so they could settle down and stop spending money on rent, New Jersey mother of two Alyssa Wolfe and her husband learned that if they saved enough to put a full 20% down payment on a house, they could get a more favorable mortgage rate. It took them five years, but they achieved their goal of saving for this payment by taking only family-related vacations, eating out less, cutting cable service and selling items they no longer needed. To stay motivated while in savings mode, Alyssa's husband had a side hustle of buying designer suits at thrift shops and re-selling them online. Those profits even helped them create a "fun money" fund for date nights and purchases beyond their everyday budget.
When you have a budget, you won't want to just set it and forget it; it's helpful to check in regularly to see if you need to recalibrate. That might mean monitoring your spending once a month and making small updates as needed. If you notice the cost of something (like a streaming subscription) changes, for example, you can ask yourself if it's something you can do without or, if it's still worth having, if there's somewhere else you can cut back. You might also want to do a more significant evaluation every year to address any bigger changes.
Sticking to a budget can help you better understand the tradeoffs you might need to make to meet a goal, and it can also help you clarify how much that goal really means to you. And while creating one does take some work, the upside makes it worthwhile. A budget can help you establish a mindset and good habits that put you in charge of your money and on the path to smarter, more values-driven spending.
— With additional reporting from Life and Money by Citi editors.
The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.