Take Control Of Your Wallet

Create a budget in four easy steps

Creating a budget is an essential first step to establishing a financial blueprint and taking control of your money. Unsure where to start? You're not alone. In a recent State Farm® "Financial Plan B" survey 35 percent of Americans said they have funds on hand to meet financial needs for just three months or fewer, with 15 percent lacking funds to meet commitments beyond a single month.
 

Whether you're starting your first job or getting ready to retire, have a little money to manage or a lot – creating a budget is the first step toward future financial security. While sticking to a budget takes discipline, it can help you stretch your dollars and achieve financial independence. If you already have a budget, now might be the right time for you to dust it off and make sure it's still current.

The State of Today's Finances

Positive Outlook
Think of your budget as a controlled spending plan that helps you decide in advance how you want to spend your income each month. Many people call their budget a "spending plan," because the phrasing is more positive.  
 

Simple Steps to Creating a Budget
1. Track Daily Spending: Create a "spending journal" using a note pad or create a spreadsheet on your computer. Track every penny you spend during the month, whether you pay with cash, check, debit card, or credit card. You also can save all of your receipts and tally them, by category, at the end of each week. If you use your debit or credit card, you likely can track your spending through your online banking account.
 

2. Itemize Monthly Income and Expenses: Divide your expenses into fixed expenses (those that stay the same each month such as a mortgage payment or car payment) and variable expenses (those that may change each month such as groceries or entertainment). Make sure you consult with other members of your household, before finalizing your list of expenses to make sure everyone is in agreement and there are no surprises. You can use our budget calculator to help you with this and the next two steps.
 

3. Compare After-Tax Income to Expenses: Your goal is to have a Positive Cash Flow.

• Positive cash flow. If you spend less than you earn and have money left over you are probably in good shape. You can use the extra money to pay off your credit cards (if you have more than one, it is smart to pay extra on the one with the highest interest rate first) or other debts, or increase your savings or investments.
• Negative cash flow. If your expenses are more than your income, figure out how you can cut back on your expenses by identifying any non-essential expenses (e.g. downgrade your cable or phone package, eat out less, or refinance your house).  If you are unable to cut expenses, find ways to increase your income (e.g. have a garage sale, use a talent to start a small side business, get a second job).
   

4. Take stock: Keep track of your spending each month to see how you're doing. If you consistently exceed your budget in certain categories, find ways to cut back in other areas so you don't fall behind.
 

Additional Budgeting Tips
 

Budgeting for Variable Expenses
Remember to factor into your monthly budget variable expenses that don't occur every month. You should still budget for variable expense such as Christmas/birthday presents or car insurance (if you pay premiums bi-annually or quarterly, for example, instead of monthly).  This approach will help you avoid the temptation of using credit cards when these expenses do occur during the year. Here's an easy way to figure out a monthly budget for non-monthly expenses:
1. Calculate or choose a yearly total for these expenses, then divide by 12 to determine the monthly impact. 
2. Each month, set aside the amount of money you calculate into a savings account where the money can stay until you need it.  
 

Ways To Save

Make sure you are getting the best deal on your utilities, cable and phone services, banking, and insurance by calling your providers to see if they have introduced new plans/deals or if they offer any new discounts. 
 

Reality Check
After a few months, review your budget to see how you're doing.  If you exceeded your budget, determine if the budget was realistic as part of your evaluation process. For instance, you may have planned a tight food budget but found that ordering a take-out pizza once a week was a sanity-saver on nights you had to work late. If that's the case, you may want to add occasional take-out purchases to your food budget while cutting back on something else.