4 minute read

It’s all about tracking money coming in and money going out.

At First Foundation Bank, we believe your personal finances should be the path to achieving your goals, rather than an obstacle that gets in the way. The first step to making your money work for you is to create a budget.

It’s about planning

A budget is a monthly spending plan. Creating a budget—deciding ahead of time how much money you can spend for the month and where it will go—helps you use your money more efficiently and meet your savings goals. A budget also makes it harder to overdraw accounts or bounce checks.

Building a monthly budget

Creating a monthly budget takes a little work at first, especially if you’ve never calculated your monthly expenses before. But by the second month, the process becomes a lot quicker.

And remember, budgeting is a popular strategy because it makes dealing with your personal finances easier, not harder, in the long run. Here’s how to start your first budget:

• Calculate your income. Add up all the money you expect to receive over the next month, including any regular work income (after taxes) and other sources of income, including investment income, unemployment benefits, Social Security payments, money from a side hustle—everything. If you make the same amount every month, look at a recent pay stub to get an exact figure. If your pay varies, calculate your budget based on one of the lower-earning months.
• Tally your fixed expenses. Now that you’ve counted all the money coming in, you have to count the money going out. Your fixed expenses are the payments you have to make in a month, such as your rent or mortgage payments, car payments, any other loan payments, cell phone bill, and your utilities that may charge a fixed rate.
• Tally your flexible needs. Next, add up the payments that may vary from month to month but that you still must pay. This category might include groceries, variable utility bills, gasoline, and certain medical expenses. Because these are variable expenses, it can be hard to pin down an appropriate total. When in doubt, base your estimate on the high side.
• Calculate your savings goals. Your budget needs to include the money you want to set aside for your various savings goals, such as retirement or a down payment on a home. These funds belong in the expense column since they are money “going out.”
• Tally your discretionary expenses. The last category of expenses includes payments for optional things, such as eating out at a restaurant or a subscription to a streaming service—costs you could forgo if you needed to.
• Subtract your expenses from your income. If your income is equal to or exceeds your expenses, then your budget is in good shape. If your expenses exceed your income, or don’t allow you to reach your savings goal, however, then you’ll need to revisit your budget to balance things out. Start by looking for ways to trim your discretionary expenses.

Budgeting strategies

With your budget in hand, your next step is to develop a strategy for sticking to it. Consider a few options below:

• The zero-based budget. The idea behind this strategy is to spend every dollar deliberately—there is no such thing as “extra” money. Once you account for your monthly expenses, allocate any surplus money to one of your expense categories, whether that means setting a little extra aside in your retirement savings or treating yourself to a special dinner out. 
• The envelope budget. The envelope budget is a zero-based budget designed for people who struggle not to overspend. Your monthly discretionary expense allocation is set aside as cash in various envelopes—one for groceries, for instance, and another for takeout lunches. If an envelope runs dry before the end of the month, you have to either stop spending on that category or reallocate from another envelope. For online purchases, you can redeposit enough cash for the transaction at an ATM and then pay with your debit card.
• The “pay yourself first” budget. This strategy involves setting aside the money necessary for your long-term savings goals before allocating your remaining funds to your other expenses. This strategy often involves automating a transfer to happen as soon as your paycheck lands in your account—or before, in the case of workplace retirement contributions.
• The 50/30/20 budget. This budget suggests spending 50% of your after-tax income on needs, 30% on wants, and 20% on savings. This strategy helps you stay on top of expenses by ensuring you are living well below your means.

Track your spending and adjust as necessary

It’s unlikely that each month will unfold exactly as you’ve planned. Regularly adjust your budget to reflect reality and reallocate money to cover any shortfalls while deciding where to put any surplus.

This process might look hard at first, but a budget is one of the most powerful tools for meeting your financial goals. Take budgeting one step at a time; it’s worth it.

Check out our Savings Goal Calculator to see what it will take to reach your goals.