angela andrews

Angela Andrews

With the new year, people often rethink their priorities to make improvements in certain aspects of their lives: resolving to lose weight, spend more time with family, save more or just handle finances better overall. If one of your New Year’s resolutions relates to finances, a personal budget can help, regardless of your income level. A personal budget is tailored to help you meet your goals. It can empower you to stop living paycheck to paycheck and also help you identify any wasteful spending that can be reallocated toward goals such as increasing your savings. For example, $5 spent each weekday on a cup of cappuccino adds up to $100, which could be deposited into your savings account. A budget can help you identify these cash leakages and turn them into savings opportunities. So, how do you get started with budgeting? First, determine all necessary expenses and net take-home pay. Once those numbers are identified, set a goal. Goals may include saving more for retirement, socking away three months’ worth of expenses for an emergency fund or paying for a new car. Your goals are personal and will evolve and change over time. Prioritize goals by their importance or timeliness. For example, replacing a car might be a more immediate need versus retiring in 10 years.

Once you have your goals, the next step is to create a series of categories, or buckets, in your budget. Let’s say you have decided to save for the car. You have a category of your budget allocated to monthly expenses (such as housing, transportation, utilities), another for groceries, one for savings and finally one for your new car. How you handle the extra categories is totally up to you, after you have taken care of the essentials. Once you determine your categories, be sure you reserve one for “fun,” whatever that means to you.

After your expenses have been recorded and divided into categories, you need to distribute your monthly income into each of these categories. Then you’re able to track all of your spending for that month and compare it to your original plan. You may find that you’ve spent money on items that weren’t in your original budget, such as the $1 you spend at the vending machine every afternoon. Now, you can go back and reallocate and reprioritize those dollars. One of my colleagues was shocked when he realized he spent $300 in one month on lunch. He decided to go out to lunch only once a week and bring lunch the remainder of the week. As a result, he reallocated that $300 to the grocery and savings categories. By continuously revisiting your budget, you can determine needs versus wants and also where you are overspending and how to adjust as needed. Also, remember to budget for categories where payment happens periodically, such as auto insurance, which may be paid once every six months.

There is no right way to budget; the process depends on what works for you personally. Some people benefit from putting cash in envelopes labeled by budget category (one envelope for groceries, another for gas, etc.) and only using cash between pay periods. Some people don’t like setting up categories, so they may take a certain percentage off the top of each paycheck for savings and then spend the remainder. Whatever method you choose, the point is to think actively about your finances, instead of putting your head in the sand, hoping the bill collectors will eventually go away. This just results in higher collection fees, interest and stress that send you constantly veering from one financial crisis to the next.    

For more information on budgeting and where to begin, refer to consumer.gov. There are also free budgeting apps such as Mint and Wally. Find a budgeting process that works for you and stick to it so that you may reach those financial resolutions. 

 

Angela Andrews is a clinical assistant professor of accounting at the Indiana University Kelley School of Business at IUPUI.

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