An Easy Way to Create a Budget to Curb Spending
With inflation soaring, here are five steps to help you stretch your dollars
By Penelope Wang
The standard advice consumers get for managing their money is to “create a budget.” But how do you actually do that?
It’s really not that hard—once you learn the steps outlined below.
Most consumers probably don’t know how much they spend every month. So it’s easy to end up paying for things you don’t really need or to spend much more than you thought. The key is to get a good overview of where your money goes and then decide what’s important and what’s not.
All this has become more necessary, of course, by the onslaught of high inflation, which most people under 40 have never experienced before. So to get more control of your spending—and even increase your savings—here’s an easy way to create a budget that works for you.
1. See Where Your Money Goes
The first step is to grab your monthly bank and credit card statements and see what you actually spend money on, says Jeffrey Edwards, a certified financial planner in Irvine, Calif.
If you haven’t been reviewing your budget periodically, you may be surprised at how much you’re spending. Perhaps you signed up for subscriptions you’ve forgotten about, or you’re dining out much more than you thought. Or it’s simply inflation making day-to-day living far more expensive.
Whatever the reasons, those unexamined costs can add up to hundreds—or even thousands—of wasted dollars, Edwards says. But that also means you have ways to free up cash, which can help offset the impact of inflation.
2. Decide What’s Important
Start by separating essential spending (rent or mortgage, food, utilities, and the like) from discretionary spending (entertainment and travel, for example).
Then break down these costs into subcategories, such as cable TV, restaurant meals, and so on.
Online tools, such as YNAB (34-day free trial, then $99 per year) and Mint (free, with optional paid features), can help make this sorting process easier. They can link to your credit cards and other accounts, and automatically label and categorize your expenditures, which makes it easier to stay on top of what you’re spending.
Decide which things you can do without. You may have recurring fees—such as a gym membership or streaming TV service—that you don’t use often enough to justify the cost.
Also look at frequent purchases, such as daily visits to the grocery store, restaurants, gas, and the like. That’s probably where most of your money is going.
But don’t overlook infrequent charges, which may come annually or semiannually, such as life insurance or auto insurance premiums.
Once you’ve done all this, you can decide how to bring your spending under control.
3. Start With Easy Spending Cuts
Cutting spending doesn’t have to be hard.
“Assuming you do have money for discretionary spending, you can probably find ways to cut back that aren’t too painful,” says Kirsten Cane Cadden, a certified financial planner in Tustin, Calif.
These include canceling forgotten subscriptions and skipping one or two restaurant meals by cooking at home. Also consider joining a warehouse club, if there’s one near you, where you can get lower- priced gas and groceries, among other savings. Check out these additional tips on how to save time and money food shopping and save money at the gas pump.
Other strategies include shopping around for less expensive insurance and negotiating with your internet provider for less expensive services. Learn how to replace cable TV for only $25 a month.
4. Automate Your Savings
As you decide what you need or can do without, don’t forget to put some money aside for savings.
“You need to treat saving and investing as a fixed expense, and the best way to make sure that happens is to automate it,” Cadden says. It’s simple to set up regular transfers into designated savings accounts or funds.
Your savings should include building an emergency fund to cover unexpected expenses, which otherwise would end up on your credit card. As a general rule, you’ll want to amass three to six months of expenses. (For options on earning more on your savings, see “7 Places to Put Your Cash Now.”)
And you’ll also want to direct savings toward your long-term goals, such as a down payment, college funds, or retirement.
5. Do an Update Every Year
Controlling spending is not a one-time exercise. You should review your bank and credit card statements every month to make sure you’re on track. And you should repeat the overview described above once a year.
These are simple steps that anyone can take. But if your finances are more complex or change radically, it may be worth getting professional help from a financial adviser. For more on finding financial advice, see “5 Things to Know About Financial Wellness Programs.”
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