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5 Easy Steps To An Effective Budget

budget

Ah, the “b” word. Nope, not that one…the other one. The one that conjures up images of spreadsheets, endless calculations and potentially, hair pulling. Yep, that’s it … budget! Sadly, it’s this kind of vision that has folks avoiding the work involved in the most effective tool you can use to take control of your money! Its bad rep of boredom and sacrifice overshadow the amazing benefits of having one.

When you create a basic budget and stick to it, it will suddenly seem like you have more money. ~Dave Ramsey

A budget gives you the freedom to choose how you spend and invest your money. And, with the amazing technology we have available today, maintaining a budget is easier than ever!

Follow these 5 easy steps and you’ll be well on your way to controlling your finances!

1. Determine Your After-Tax Income

This amount is your total take-home pay, after Uncle Sam takes his cut, of course. Besides a regular salary, you should include any other income that comes your way during the year. This could include a side hustle, alimony, child support, interest, dividends, social security, year-end bonus, etc.

Have any automatic deductions like a 401(k), savings or insurance? Be sure to account for them so you have an accurate picture of your income and expenditures. If you’re married or have a significant other that you share expenses with, include their income as well.

2. Calculate Your Expenses

This is where the fun really begins! Grab your bank & credit card statements and any other financial files you keep…and possibly a can your favorite energy drink. While most of your expenses are monthly, some may occur only quarterly or annually, so using 6-12 months’ worth of statements can help you get the most accurate financial picture.

List all your expenses – we’ve included a Personal Budget Template to help you get started. Depending on your budgeting experience, or enthusiasm for details, you can either:

  • Get an average monthly expense by adding up everything you’ve spent in the last 6-12 months and dividing it by the number of months.
  • Break out your expenses by month. For instance, if your HOA fee is paid the first month of every quarter, you only have to include this item in your budget as an expense for January, April, July and September.

3. Subtract Expenses From Income

Your budget should account for every dollar. Although possible, it’s not likely that your expenses will match your income exactly. If your expenses are greater than your income, revisit your budget and see where you can make some cuts. If your income is greater than your expenses, you’ll want to account for those remaining dollars. You could start an emergency fund, pay down debt, invest them in retirement, etc. Just give them a home or they’ll find one of their own.

4. Budget Adjustments

Are you putting your money where your priorities are? Once you’ve taken a look at where you’ve been spending your money, you can make any necessary adjustments to create a budget that reflects your financial priorities. Let’s say after reviewing last year’s expenses you’re surprised to learn that the $5 coffee you grab on the way to work every morning is costing you $1,250 a year…YIKES! What if you got coffee only twice a week and put the $750 you’re saving towards your monthly debt? Or better yet, what if you make your coffee at home every day and saved the entire $1,250?

5. Record & Track Your Spending

Now that you’ve created this beautiful work of art (yep, we’re still talking about your budget), it’s time to put it to good use! Decide whether you want to use technology or take a DIY approach to your budget. If you decide to go the technology route, having software that links to your accounts, downloads all your transactions and categorizes them can be a great time saver. If you’re not comfortable with having your accounts linked to your budget software, using a spreadsheet or good old pencil and paper are still great options!

Review your budget at least once a month to see what money is coming in, how quickly you’re spending it and what you’re spending it on.

Life Happens, Be Realistic

Remember to be realistic about your budget. If you fall off the wagon once and a while, hop back on as soon as you can. If you stick to your budget the majority of the time, you’ll be successful in reaching your financial goals!

The information contained herein is general in nature and based on authorities that are subject to change. Churchill Mortgage guarantees neither the accuracy or completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Churchill Mortgage assumes no obligation to inform the reader of any changes that could affect information contained herein. This publication does not, and is not intended to, provide legal, financial, tax or accounting advice, and readers should consult their advisors concerning the application of tax laws to their particular situations.

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10 Ways to Manage Lifestyle Inflation

Lifestyle inflation is a part of our culture that seems to make sense on the surface: people tend to spend more if they have more. But this can start to spell financial disaster if we’re not careful.

It can be easy for people to feel as though they need to keep up with their friends’ and coworkers’ buying habits. After all, you work hard and you deserve to treat yourself to those upgrades and splurges you’ve had your eye on. Right?

While it’s not always a negative thing, rewarding yourself too much can damage your finances—now and in the future. Here are 10 ways to manage lifestyle inflation so you’re not spending money on things that don’t meet your future goals.

10 Ways to Manage Lifestyle Inflation

1. Be Aware of Lifestyle Inflation

Prepare yourself for how you’ll handle extra cash coming your way. If you escalate each of your regular expenses when your paycheck increases, for example, it’s as though you didn’t get a raise at all.

It’s not until you became conscious of lifestyle inflation that you’re able to curb your spending and seriously consider how to handle the extra cash.

It’s all-too-human to feel as though it’s time to uplevel your lifestyle when you earn a higher salary, so it’s best to be on the lookout for these impulses.

2. Don’t Count on Those Bonuses

A bonus feels like a great opportunity to spend some money on yourself. After all, you earned it through your own hard work!

Just don’t assume you’ll be able to earn the same bonus on a regular basis. Be sure to treat every raise, bonus, or stock dividend as a one-time windfall, and save as much as you can.

3. Calculate the Real Significance of a Raise

After factoring in taxes and expenses, a raise is often less significant than you first thought. It’s not always fun when you feel like celebrating, but it’s important to gain perspective by calculating the real change to your budget and determine how that extra money is going to realistically impact you.

Let’s say you’ve just gotten a $12,000 annual raise—that’s $1,000 more per month. Then subtract about $400 per month for taxes (although this will vary), and that raise now comes out to $600 per month. This is significant, but not quite enough to result in a huge lifestyle shift.

4. Embrace Experiences Instead of Things

When you start making more money, you should feel empowered to use some of it to improve your lifestyle. Then, instead of looking for a new car, house, or designer clothes, consider investing in experiences.

Go on a vacation, sign up for a class, or finally travel to visit a friend you’ve been meaning to see. You’ll create lasting memories that leave you fulfilled, rather than a short-lived feeling that needs to be replicated when, say, you buy a new wardrobe.

5. Spend Time With Friends With Similar Budgets

It pays (literally) to spend time with friends who have similar budgets to yours, rather than big spenders. When you want to be able to afford the same things as your friends, you might fall victim to lifestyle inflation and spend more than you mean to – especially when you’ve gotten a recent salary increase.

If your friends live an inflated lifestyle, you might be enticed to go to a pricier restaurant, order expensive drinks, for instance, or even pick up the whole tab. On the other hand, if your friends live more modestly and you match your behavior to theirs, you’re far less likely to overspend.

6. Transfer Extra Cash ASAP

Remember that if you’re satisfied with your current lifestyle, there’s no pressure to change it! And if you want to invest the extra funds coming in from a raise or a new job, get it out of your bank account right away.

If you don’t need the extra money to cover essentials, pause for a moment before you start spending. Consider setting up an account and transferring the excess so you don’t end up spending it unnecessarily.

7. Outline Your Goals

Without clear objectives for you and your family, getting a raise or promotion can put you on the fast track to lifestyle inflation, spending the extra money on things that don’t bring you closer to your goals.

When you get that increase, sit down with your spouse and talk about where you see yourself in the future—maybe as long as ten years down the line. Would you like to save for your child’s college education? Do you want to travel more? Pay off debt or buy a home?

It’s time to establish a game plan to pinpoint where that extra money really needs to go. You’re much less likely to get trapped in a cycle of lifestyle inflation if you stay focused on your goals and understand how that windfall can help you achieve them.

8. Avoid New Debt

When you get a raise, it’s easy to think you can now “afford” new debt. The truth is, when you get a raise it’s absolutely a step backwards to finance a new car, rack up your credit card balances, or go into major debt at all. This new debt will only spread your budget thinner, despite the fact that you’re earning more.

A better practice is to pay off any current debts, beginning with the smallest. When everything is paid off, open savings accounts for a car, home, or other larger purchases. When the time comes to buy, you’ll have stowed away a larger down payment and can likely get a lower interest rate.

9. Change Your Lifestyle Gradually

When you achieve success in your life, there’s absolutely nothing wrong with improving your lifestyle. But to avoid lifestyle inflation, the most successful people increase their spending little by little when it comes to things like homes, cars, clothing, and vacations.

Remember that when you increase your lifestyle, your long-term expenditures also escalate. That pricey car might require a more expensive mechanic, and your large new home will call for more upkeep. Especially in the weeks following your raise, celebrate reasonably and feel proud.

Then plan your next moves around incremental changes rather than huge, life-altering decisions.

10. Don’t Equate Success With Material Things

Our society is so rampant with built-in lifestyle inflation, it can be easy to forget that luxury goods aren’t limited to the wealthy. Just about anyone can qualify for the credit they need to purchase cars, homes, boats, and other items without actually being wealthy. It’s all too easy to be living alongside people in a completely different tax bracket, and desperately trying to stay financially in step with your new lifestyle.

At the end of the day, the true measures of success are health, love, friends, family, and experiences. New material things are no substitute. If you’re happy with your quality of life, you shouldn’t feel the need to prove it with lavish purchases, and yet it’s so very tempting.

And who knows? If you’re careful with your new financial windfall and avoid the pitfalls of lifestyle inflation, you just might be the envy of your neighbors when you’re easily able to retire, travel, and enjoy life instead of paying off debt far into the future.

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