Tips to Build a Lock Tight Budget

With Doug Winquist, Residential Loan Officer,
Bank Mutual Mequon

Many people mistakenly believe building a budget is a lot of work. The truth is, taking a little time now to understand your spending patterns will give you greater control of your money, saving you from financial headaches down the road.

Creating a budget doesn’t have to be complicated. It can be as simple as starting with identifying your take-home income to help understand what amount you can spend each month. Your take-home income includes your gross pay, minus deductions for taxes, benefits, retirement contributions or others.

Once you’ve determined your take-home income, you can begin tracking your monthly expenses. This will help you create a budget that works for you based on your spending habits. Your expenses can be easily divided into three categories. These cost categories are essential expenses, discretionary expenses, and savings and investments:

  • Essential Expenses – These expenses include items that are necessary for living. You should plan to spend about 60% of your monthly take-home income to cover these expenses each month. Essential expenses can be further broken down into fixed and variable expenses.
    • Fixed Expenses – These are expenses that more or less stay the same each month. For example, your mortgage or rent payment, car payment, student loan payment, insurance and utilities. If you carry credit card debt, you should also include your monthly payment in this category.
    • Variable Expenses – These are expenses that can vary each month. For example, groceries and gas.
  • Discretionary Expenses – These expenses are non-essential expenses and include items such as entertainment and dining out. You should limit your spending in this area to about 20% of your take-home income.
  • Savings & Investments – Including savings and investments in your monthly budget will help ensure these expenses get the attention they deserve. A general rule of thumb is to save up to 20% of your total income. Keep in mind, however, that this percentage includes contributions made pre-tax to your retirement account or other investments.

There isn’t a lot you can do about your essential costs. However, you can work with your discretionary expenses to get your spending in line with your budget. If you find you’re over budget, try focusing on just two or three categories within your discretionary budget and carefully track spending in these areas. You may discover you can make minor changes to reduce your spending. For example, if a good portion of your paycheck goes toward buying lunch every day, try cutting the amount you spend by bringing your lunch at least three times a week.

Initially it’s a good idea to check in on your budget weekly to see how things are going, but eventually you can do it monthly. Remember that your budget may need adjusting. For example, if your rent increases, you’ll need to adjust your budget to account for the added expense. There’s also an element of trial and error – you may find that you need to budget more for groceries than you initially planned, but that will mean reducing your spending in another category.

Online banking can help you manage your budget. Some banks offer additional features within their online banking that allow you to access all of your accounts and see a breakdown of how you’re spending your money. You can also keep a hard copy of your budget and track your spending using a simple worksheet.

Once you get a handle of your spending, you’ll find you have more control over your finances because you’ll understand exactly where your money is going. And with that knowledge comes a stronger likelihood of achieving your financial goals and being able to do the things you want to do in life.

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