Budgeting Basics: Creating an Effective Spending Plan

The secret to budgeting is that there is no big secret to budgeting. It begins with knowing how much money you are bringing in and subtracting your expenses for a given time-period. What some may forget is that a budget is actually a plan. It’s the kind of plan that helps you take control of your expenses, distributing where your money goes as needed. Like any plan, budgeting requires consideration rather than hasty action, but don’t let that discourage you. A well-thought-out budget can help a household save, spend, and share money.

If you are ready to give budgeting a shot, we have some tips for you.

Know How Much You Have to Spend

Review your expenses for the last few months before creating a budget so that you have an understanding of how you typically spend your money. Bank statements, especially online reports, come in handy here. However, receipts can also be very helpful in identifying where you are truly spending your money. For example, a receipt from a gas station will show the amount spent on gas but will also include any snacks you picked up. Categorize those results and compare them with where you thought you were spending your money. Where are you spending the most? Is it at the grocery store? Eating out? Your mortgage payment? Then, look for what category of spending would be useful to bolster. Does your child need new clothes? Have you been struggling to pay the utility bills? With your goals in mind and your expenses known, you can decide how to allocate your funds and choose where to cut costs.

Many people have the same amount of income each month, so you know what your budget can support. Add up all sources of net income, including your job, and your spouse’s job. Remember to also include periodic distributions, bonuses, or other sources of income such as retirement distributions or Social Security income. Once you add up all your income sources, you will know how much (and when) you can spend. You may have to reallocate funds to meet your budget. It will be a give and take. Cut the grocery bill to spend more on transportation. Stop the morning coffee run to put extra toward the mortgage. There is a balance to be made. Once you find it, write it down.

Put Needs Before Wants

Consider your needs before your wants. Your needs are things that you cannot live without, expenses that support your career, or investments that support a prudent financial plan. They include food, shelter, utilities, transportation, childcare, insurance, your emergency fund, and savings. Your wants are lower priority items such as fun outings, takeout from restaurants, and vacations. Be honest and be picky when determining your needs versus your wants. You need to pay for gas to get to work each day; you want to pay for a getaway in the mountains.

Your children may want the newest phones or latest gadgets when they come out, but life will get tougher for your family if you prioritize buying a luxury phone over paying a utility bill. Allocating your funds to prioritize needs is critical when it comes to creating your budget.

Don’t Be Afraid to Reassess

Every month can be different. Unexpected things happen, but you can account for them in your plan. You might celebrate your anniversary with a night out one month and then have to pay for your pet to visit the vet the next. Car insurance payments may be due every six months. You know some things are coming each year, and with some saving and planning, you can be ready for them. Allocate a small amount of money to your savings account to prepare for reoccurring payments, routine car maintenance, birthday gifts, and other expenses.

When it comes to one-off payments and occasions that call for an increase in spending, make sure that you prepare for those expenses in your budget ahead of time by cutting back somewhere else. Holidays and birthdays happen at the same time every year, so plan for them. A good budget will prevent you from being surprised by a routine event.

Prioritize Debt

Prioritize debt payments over nonessential new purchases. The longer that debt goes unpaid – particularly credit card and vehicle loan debt, which tend to have high interest rates – the more time it has to collect interest, which further increases the amount of money you must repay. It may seem impossible, but putting just a bit of extra money aside for debt payments each month can make a significant difference to your future finances.

If your debt-to-income ratio is too high, you may find that it begins to negatively affect your credit score. This can make it harder for you to buy or rent a house, take out a loan, or initiate a cell phone contract. Paying down debt not only lowers your debt-to-income ratio, it can help increase your credit score – not to mention provide you with the sense of relief that comes when you no longer have debt concerns. If you can cut costs and push money toward debt payments while still fulfilling your family’s needs, it is wise to do so.

Pay Yourself

Often it is best to pay yourself first. This strategy has you include monthly savings and investing as another “expense” in your spending plan. This prioritizes savings, but still allows for necessary payments like housing, utilities, and insurance. If you wait until your wants and needs are met before setting money aside, you may find you have nothing left over for savings.

Consider establishing at least two savings funds: an emergency fund and a rainy-day fund. When it comes to these funds, you do not have to put money away forever. Once you reach your savings goals, you can then divert money elsewhere. If you do not have adequate savings when you need them, you may find yourself struggling financially. An important part of your budget should be ensuring that you have the ability to survive emergencies without having to go into significant debt.

• Emergency fund: An emergency fund typically holds three to six months of living expenses and is intended for use in a true emergency, like helping you afford your monthly bills should you or your spouse lose a job and need time to find another one.
• Rainy-day fund: A rainy-day fund is a smaller fund consisting of around $1,000, that is intended to pay for one-off events, like automobile deductibles from an accident or an emergency vet visit for your pet.

Consider the Future

One of the biggest assets you have is your ability to earn money, so it is important that you have a plan in place should you no longer be able to provide income for your family. Everyday bills will still need to be paid, food will still need to be provided, and most debt will continue to accrue interest. Having a life insurance plan in place will protect your family from having to deal with money troubles on top of the emotional trauma of your passing or incapacitation. Navy Mutual’s Flagship Whole Life insurance product will pay out a death benefit upon your passing or diagnosis with an eligible chronic or terminal illness. Our Level II Plus term life insurance product will pay out a death benefit should you pass during the term selected. Benefits from both plans can be used to pay off debt, fund a child’s education, cover final expenses, and replace your income. It can be hard to think about, but the peace of mind that comes with knowing your family is safe and protected should something happen to you is priceless.