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Six Steps to Setting Up a Budget This Year

A couple working on their budget.

If you’ve always wanted to learn how to budget, but never knew how to get started, now is the perfect time. The beginning of the year is when many people are motivated to start fresh, even when it comes to finances. Don’t let the idea of budgeting or money management cause you stress. Regardless of whether you have fancy budget software to help you or you’ve created your own custom budgeting tools, follow these six steps to keep budgeting simple.

1. Know Your Goals
The first step to setting up a budget, regardless of income or life stage, is to know your personal goals. Without goals, it’s challenging to stay motivated and difficult to know why you’re organizing your finances in the first place.

For most people, the ultimate financial goal is complete and total independence. Financial independence means different things to different people but for many people, it means the freedom to be able to do most of what you want in life without worrying about money. This type of lifestyle usually includes things like being debt-free, having a significant savings, and making some kind of investments. These milestones are much easier to accomplish when you have a budget based on your ultimate goal and a clear path that can get you there.

2. Know Your Income
Once you’ve determined what your goals are and why you’re setting up a budget, you need to know exactly how much income you earn each month. This is simple for those with one, or even two, steady jobs or streams of income flowing into their household bank account each month. However, it can be difficult to know your exact income if your income fluctuates due to a commission-based job or if you’re self-employed.

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If your income fluctuates, you should budget based on an average income from the last 12 months. During months where you earn more than expected, you can put the “extra” away for months when your income is lower than average. Another option for those with commission-based jobs who earn this commission as a “bonus” is to create a budget around your base salary, excluding your commission bonus.

3. Know Your Expenses
Speaking of electric bills, it’s important to gather up all your monthly bills and spending information from the past few months. This includes things like utility bills, credit card bills, auto insurance, and a record of the transactions that you might pay for with cash or your debit card, like gas for your car, groceries, etc.

If you haven’t been tracking your expenses, it can be difficult to know exactly what you’ve been spending in some categories. In this case, it’s best to estimate your monthly expenses and adjust your budget in the coming months as necessary. Taking a little time to really understand your spending habits can help you set goals and stay on track. It’s important to be aware that even little expenses can add up over time.

4. Know Your Weaknesses
Everyone has areas of their budget that they struggle with. Usual weak spots tend to include fluctuating categories like groceries, eating out, or entertainment. These are the things we usually want to spend money on, and because they’re fun, it can be hard to cut back on them.

Instead of beating yourself up over these weak spots, try and give yourself a little more wiggle room in those areas if your current income and expenses will allow it. While you shouldn’t go crazy with spending in these areas, you can’t completely deny yourself occasional splurges either. If you try to avoid spending on things like eating out and entertainment, eventually you may feel deprived and that can sometimes result in a spending binge.

If your budget is really tight and you can’t afford any wiggle room, try to find cheaper alternatives to activities and purchases you already enjoy. Another alternative is to find a way to earn more money so you can budget more in these areas.

5. Get Organized
Now that your basic budget is pretty much set up, you still need to do some maintenance on it from month to month. Spend a little time at the end of each month working on the budget for the coming month. Be sure to add in extra events and expenses that you are aware of so you can stick to your budget as closely as possible.

You also need to monitor your spending each month and keep track of how you’re spending money. This will help you make sure your budget categories are set up and funded appropriately. Checking in on your spending in the middle of the month can also help you know if you’re on track or need to be a bit more aware of your spending for the last two weeks of the month.

6. Be Accountable
Last but not least, one of the most important steps you can make when setting up a budget is finding some accountability. If you’re setting a budget to help you reach goals in the pursuit of financial independence, accountability is key to achieving those goals. Financial accountability can come from a variety of sources. If you’re married or in a serious relationship, your spouse or partner may be able to provide all the accountability you need to stay on track with your monthly budget.

Setting up a budget for the year to come is not technically difficult, but it does require some discipline and possibly new habits. If you can master it, you’ll not only feel like you have control of your finances, but you will set yourself up for a lifetime of financial independence.


Visit UFCU.org, give us a call, or visit your local financial center anytime to chat with a Personal Financial Representative.