How to Overhaul Your Budget

By Steven Shaw on 6/8/2014

Personal Finance

How to Overhaul Your Budget

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Making a budget can seem easy — you basically decide how much of your income should be allotted to the different types of spending you do each month. The best budgets are honest and frequently re-evaluated.

While it’s a good idea to look over your budget every so often just to make sure you are making the best choices, when your long-term financial goals change it may require an emergency budget session. An example is when you decide to start saving to buy a house.

The goal of the budget session is to figure out how to save smartly for the new goal and enjoy your lifestyle. Here are the major pitfalls people face with budgets and some successful methods to budget better.

Budget Blunders

If your budget is focused only on the present, something isn’t working. To go back to budgeting basics, start with tracking your spending. Keeping receipts, making a detailed spreadsheet, recording every time you spend money and looking over the details of your credit card statements may seem like a waste of time, but they help you see exactly where your money is going. There are also several websites and smartphone apps that can help with this process.

A common problem you may be running into is underestimating your spending. While some expenses are fixed, others fluctuate and it is best to over-estimate how those will affect your budget.

Another large mistake is only leaving room for the essentials in your budget, and not accounting for emergency or special occasion spending. Oftentimes, friends’ birthdays come up, a co-worker is having a bridal shower, or, hopefully less often, you need to pay for a trip to the emergency room. Being prepared for all of these expenses will lead to smoother budgeting. This is not quite an emergency fund but something for the “other” expenses of life that you know will come up but you don’t know exactly when.

If there is any extra income that was not used each month, it can be added to savings and bring you even closer to your long-term goal.

Budget Breakdown

Sometimes it can help to have a benchmark when creating your budget. One of the most widely accepted plans, championed by Sen. Elizabeth Warren (D-Mass.), outlines a 50-30-20 breakdown of needs, wants and savings of after-tax pay. This means you will have to go determine what counts as a need and what counts as a want, while leaving room for saving in your budget.

Once you’ve tracked your spending and reorganized your budget, it’s all about sticking to it. Even though it may seem easy to set and track spending, it is just as easy to slip off track or to try to keep up with how the people around you are spending. It’s important to learn to spend money how it works best for you, regardless of what others are doing. The more thought you dedicate to budgeting decisions, the more likely you will be to reach your long-term financial goals.

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Image: iStock

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