Budgeting Basics

Learning the basics of money management can help you reach your financial goals. The better you budget, the more secure you'll feel. Remember: A budget isn't just a tool to help you live within your income and manage your monthly expenses. It can also help you get organized about what’s important to you so that you can leverage your hard-earned money to get what you want. 

Cash Flow

Cash flow refers to managing the money coming in and going out. The goal of tracking your cash flow is to have cash on hand to pay necessary bills and expenses. People run into trouble when bills are due before they have cash to pay them. For example, if you make $1,000 every other week, and your expenses for the month total $1,800, in theory, you have enough money. However, if $1,200 is due before the 15th of the month, you might not have enough in cash to pay bills on time.

You have a few options to improve your cash flow management. First, make a list of your expenses and their due dates, noting when income is added to your account. Look at the chart below for an example.

For the short term, you may be able to ask creditors to adjust due dates. In this example, if you could change the cell phone and internet/cable due dates until after that second paycheck, you’d be able to pay those bills on time. 

It’s also smart to allocate money throughout the month for variable expenses, like groceries and gas. Long term, as you continue to save money, build enough of a cushion in your account to accommodate monthly fluctuations.  

Setting Up Your Budget

You can create a budget in 4 easy steps.

1. Identify your monthly income or take-home pay from your regular paycheck. You may even have other sources of income or extra money to add to this net income—for example, from a rental property or a part-time job.
   
   Tip: If you're Active Duty, don't include military housing or food allowances in the income portion of your budget since they can disappear if you're deployed.
2. Write down the amount that goes out each month on a regular basis before the end of the month. These are called fixed expenses. You can find these expenditures on your bank statements and credit card statements. They may include items such as mortgage payments and student loan repayments. You can also use our monthly spending calculator to help track these expenses.
3. Divide your expenses into 2 categories: fixed and variable. Fixed expenses are the ones we discussed in step 2, but also include payments like rent, car insurance, car payments and internet bills. Variable expenses include expenses that change from month to month, like groceries, dining out, clothing and credit card debt payments. Remember: There are always unexpected expenses, too, like car maintenance.
4. Total the income and the expense columns and make a plan for how you'll spend that amount of money this month. 
   
   Tip: To help simplify the process, consider using basic programs available on your computer like an Excel template or a budgeting app, or using a specialized program like Quicken.

Sticking to Your Budget

Now that you've set up a budget, it's time to put it to use. During the first few months, continue to track expenses and compare them to your spending. 

Remember: This is your plan, so spend a few minutes thinking about what you want. The following questions may help you hone your budget worksheet into a budgeting plan that complements your goals:

• Does the monthly budget match your financial reality, or does it need to be tweaked?
• Are you staying on track with your spending plan? If not, what needs to be changed? If so, what was easy?
• Can your spending habits be trimmed?
• How can you make your personal budget work for you?
• What are your short-term financial goals? What are your long-term financial goals?
• Is the budget set up to help you reach them?

To answer some of these questions, start by making a list of your short-term and long-term goals. Short-term goals will be goals you want to reach within a year or less, while longer-term goals might take several years, such as a down payment on a house.

Develop a list of priorities based on how important they are to you and how soon you'll be able to afford them. Separate the fixed expenses from the variable expenses. Keep a record of what you're spending. And be honest with yourself—some months you’re bound to go over your budget, but don’t beat yourself up! Use what you’ve learned about your spending to tighten your belt or adjust your budget. 

Spending Options

When it comes to spending money, your options are usually paper (cash and checks) or plastic (debit and credit cards). Both credit and debit cards offer security and convenience that cash and checks don’t, but they’re processed differently. Credit cards draw against your line of credit, and you’ll be billed monthly. Debit cards draw money from your checking account immediately.

Credit Cards

Credit cards allow you to borrow money to make purchases. The card issuer sets up a line of credit, meaning you can borrow up to a certain amount, and only pay for the amount you use. You may pay interest (a fee that's a percentage of your balance), depending on the terms and conditions of the card and whether you pay off the balance each month.

Debit Card

With debit cards, you can make purchases, withdraw cash from an ATM or get cash back at checkout. Although you won't be paying interest, you may be charged a fee if you use another financial institution's ATM. (Some banks and credit unions refund some or all fees.) Debit cards don't create debt unless you overdraw your account. Signing up for overdraft protection can limit fees if you overdraw. Some debit cards have daily purchase amount limits, so they may not be the best choice for large purchases.

If you’re using a credit card, make sure that you’re tracking your monthly payments in your budget as a variable expense. You likely won’t have the same amount to pay off every month, but you’ll want to factor your credit card payment into your monthly expenses. 

Tools for Managing Your Money

No matter your method of spending, you can manage your money with the help of these tools:

Mobile/Online Banking

Most financial institutions offer secure 24/7 access to your accounts through mobile apps and online banking. Features include bill pay, account management, deposits and check ordering. Some allow you to apply for loans, open new accounts or enroll in direct deposit.

Budgeting Tools

Budgeting websites and financial institution programs and apps can simplify money management. Some let you view detailed expense breakdowns, track spending habits and link multiple accounts, automatically pulling in transactions and listing them together for easy viewing.

Notebook or Spreadsheet

Jotting down or typing in purchases as they happen can be a wake-up call for spending habits out of line with your stated goals. 

Improving your understanding of these basic financial concepts can help you manage money better and build a solid financial future.