Budgeting requires determining all of your expenses and that includes much more than just your monthly bills. To be financially smart, it is best to start with a budget as it is an effective way in helping you save and spend wisely. Start your budget planning process as soon as possible, but know it will likely take at least six months to a year of tracking all of your expenses before you’ll have a clear understanding of where all your money goes.
Begin by drafting an entire monthly budget. Estimate how much money you will need to meet your expenses and still have enough left to meet a standard of living you will enjoy. In the same way, you can estimate all future living expenses to get an idea of how much you'll need to retire comfortably too, so you know how much to save as well. Remember to include food costs, mortgage payments or rent, utilities, insurance expenses and transportation costs.
To help track your expenses, gather your entire bank and billing statements and receipts from the past three months (or keep track of all of them for the next three months). There are a lot of online tools and mobile applications available to help you track your expenses and budget your income accordingly. Your goal is to record every dollar you spend including credit, checking and cash. Once you have every expense recorded, divide your expenses into three categories: fixed essential, variable essential and non-essential.
Fixed expenses are expenses that are the same each month, such as rent or mortgage, car payments and car insurance. Variable expenses change each month and include car maintenance, gasoline, food, electricity, and phone. Non-essential expenses include most of the things we don’t need, such as movies, magazines, dining out, gifts and snacks. Clothing can be labeled both essential and non-essential. Budget enough money just for the essential amount of new clothes (to replace things that or worn or no longer fit), but not the impulse buys you purchased just because something was on sale. Once you have all your expenses in writing, and separated into these three categories, it will be easier to see where your money goes, including potential wastes.
Next, calculate your expected income. Be sure to include home equity and investments. Volatile markets and decreasing company benefits mean there are no guarantees for determining your income, but we can give you a general idea of what you can expect given your current investments and employment.
The third step in creating a budget is to consider health care and long-term care expenses. By assessing your current medical condition, expenses and future care plans, we can help you generate a relatively accurate health-care estimate.
Once you have your budget together with expenses, including health-care costs, and your estimated income, you should be ready to follow your budget. Practice living on your budget for at least three months. If you struggle, look back through your budget and see which expenses you can cut. If your expenses are as bare as you can make them, you may want to look at possible ways to increase your income. Just like today, your retirement years will require you to closely manage your income and budget. If you don’t plan for the future now, and get used to a budget while you’re still young your future may be limited.