Few people love budgeting, but it's a valuable practice, as it can help you live a financially healthier life. It can even be kind of fun, as you figure out where all your money comes from and, more importantly, exactly where it's going. But if you're going to go through the trouble of budgeting, do it as well as you can. Here are three things that every budget should have.
1. A goal
Selena Maranjian: One thing that a budget should have if it's to serve you well is a goal. You can come up with your goal before or after jumping into the process of budgeting -- and you might tweak it over time, too.
For example, you might decide that you want to contribute the maximum allowed to your Roth IRA. For 2016, that's $5,500 for most folks and $6,500 for those 50 or older. If you're aiming for $5,500 over 12 months, that's about $460 per month. Once you have a goal like that, you can use a budget to figure out how you're going to get that money. You might currently have about $250 in extra money each month, and might need to find $210 more. If you see that you're spending $45 per month on a gym membership you no longer use, you might cancel that. If you spend about $12 per weekday eating lunch out, you might brown-bag two lunches per week and save $80 per month. A call to your cable company might help you find $20 per month in savings, perhaps by dropping some premium channels -- or you might cut the cable cord and mostly stream your entertainment.
This kind of examination of your spending habits and where you can make changes can help you meet goals. Remember, too, that you might improve your picture not only by cutting costs but by increasing your income. Perhaps sell some items or do some odd jobs on the side -- tutoring, freelancing, carpentry, knitting sweaters to sell, etc.
2. Realistic numbers
Brian Feroldi: When crafting a budget it can be quite tempting to set unrealistic expectations for yourself. After all, it's not hard to tell yourself that you will only spend $50 at restaurants for the entire month, the same way it's easy to tell yourself on New Year's Eve that you will start visiting the gym every day.
If you set unrealistic expectations for yourself in the planning phase, the odds are high that you will bust through the ceiling of your budget in no time. That can make you feel like you failed, which can lead to giving up.
To avoid that problem, use realistic numbers right from the start. You might not be saving as much as you hoped for right away, but giving yourself a chance at coming in ahead of your plan is a smart idea. Doing so does wonders to keep you motivated enough to do it month after month.
So how can you find these realistic numbers if you've never budgeted before? Most credit card companies these days provide free tools to help you slice and dice your past spending habits, and many will even break them down by category. This is a great place to start, and over time you should get better at forecasting your spending levels. Once you do, you can start to dig in and cut back on unnecessary spending, which will in turn turbo-charge your savings rate.
Matt Frankel: Selena and Brian both make excellent suggestions. Goals are extremely helpful when trying to stick to a budget, and it's important to be realistic. Otherwise, your budget is doomed to fail. I'd like to add that a wisely crafted budget needs to have some degree of flexibility.
In other words, you need to expect the unexpected. Let's say that you budget a reasonable amount for groceries, entertainment, clothing, and other costs, and midway through the month, you find out that your electric bill is $100 more than your highest expectations. Where does that extra money come from? Do you need to tap into your savings, or does it come out of your grocery budget?
Unanticipated expenses happen, so it's smart to incorporate them into your budget. After you separate your budget into spending categories and allocate a reasonable amount of money for each, your budget should have at least a little bit of money designated as "flexible spending" or something similar. If you don't end up needing the money to cover expenses, you can add it to your savings or use it to buy something you want.
In my experience, a budget with no wiggle room is destined for failure.