What’s Your Cash Flow?

You can’t create a budget if you don’t know how much money is coming in and going out. Eric Roberge, a certified financial planner in Boston says, “The first step in making a budget is to create a personal income statement.” He recommends looking at your previous month’s spending and then continuing to track your spending for the next few months so you can see where your month is going.    

“Awareness is the key to creating a budget… or as I like to call it, a spending plan,” says Roberge. “If you think about it, a budget is based on how you spent money in the past. You can’t change that. However, a spending plan is forward looking, allowing you to choose how you spend your money for the next month. It’s a slight difference, but it helps mentally and emotionally.”

What Are Your Long-Term Costs?

Most people have expenses that don’t have to be paid every month, such as a semi-annual homeowners or renters insurance payment, car repairs, or a new electronic device, which may be overlooked when making the budget. If you don’t plan ahead and spread these costs over the course of the year (or in some cases — like buying a new car — multiple years), the cost can bust your budget. For example, if you have a $300 car insurance payment twice per year, instead of having to seriously curtail your spending in the months the payments are due, budget $50 per month for the bill and set it aside so you have the money when it’s time to pay. “I help my clients establish a 12-month personal income statement just for this reason,” says Roberge.

Have You Left Room for Incidental Costs?

Don’t forget to include room in your budget for one-time costs. By itself, the speeding ticket you got last month or the birthday present you bought your brother might seem like a small expense, but if you add up all the incidentals you pay for over the year, it can make a dent in your budget. “If it isn’t a fixed cost each month, it may not make it into the spending plan,” says Roberge.

What’s the Plan for Your Financial Future?

When you’re making your budget, it’s easy to focus on your immediate costs at the expense of your financial future. “The most common thing people overlook is the future — not tomorrow, but the long-term outlook for themselves and their families,” cautions Roberge. Accordingly, he recommends that before you start your budget, you write out the financial goals you want to achieve over the next year, five years and even 10+ years. “Make your goals real,” encourages Roberge. “If you are truly committed to those goals, you will do what it takes to reign in your spending. Otherwise, you may just give up because you didn’t put anything important on the line.”