If you’re like most people, you work hard for your money. While much of that income goes toward meeting your obligations—housing, food, cars, insurance—it’s nice to have a little extra for the finer things in life.
The key to having enough for both your wants and needs is to spend your money wisely, which means developing a budget. A household budget is like a written blueprint for spending that helps document how much you take in, how much you pay out, and how you might stretch your dollars a little further.
Our calculators at Berkshire Bank can help you run the numbers. Budget tracking software and apps like Mint, Quicken, and You Need a Budget are also excellent tools for money management and planning.
Before you dive in, here’s an overview of what you’ll be doing and why it should pay off.
Add up your income. You likely know your annual salary, but to compute your household budget, you’ll need to know how much you earn monthly. Reference paystubs for all the wage-earners in your family to get a sense of your total monthly household income. Be sure to also account for regular income from other sources, such as interest or dividends. Subtract the amount deducted for taxes, Social Security, Medicare, and your retirement plan. Your take-home pay after all expenses have been deducted is known as your net income.
Compute your expenses. How much do you spend each month? Expenses can be divided into two categories: fixed and variable. You pay the same amount every month for fixed expenses, like housing, car loan payments, and cable. Variable expenses change month to month, and can include grocery purchases, electric bills, clothing, and entertainment costs. You can find expense information by logging into your Berkshire Bank online banking account to review your checking account payment history and eStatements. Individual expenditures are also listed on credit card statements, which you can view on paper or online.
Calculate the difference. The next step is to use basic math or a simple budget calculator like this one to determine the difference between your income and your expenses. If your net income exceeds your expenses, you’re in a great position and can work to make that gap even larger. If your expenses exceed your income, you know you need to look for ways to save.
Set financial goals. You’re most likely to follow a budget if you have specific financial goals in mind. These can be short-term goals, such as paying down debt or buying new appliances, or long-term goals, like saving to buy a house, fund a child’s college education, or build a retirement nest egg. Stay motivated to save by writing your financial goals in a place where you’ll see them each time you work on your budget.
Crunch the numbers. Now it’s time to really get organized. Divide your expenses into categories. These might include housing, transportation, loan payments, utilities, food, health care, and entertainment. Within those categories, identify each month’s fixed costs and variable expenses. You probably won’t be able to alter your fixed costs very much—after all, you have to pay the mortgage. But taking a hard look at your variable costs can pay big dividends. Find creative ways to save money, like dining out less often, reducing your electric use, and carpooling or taking public transportation. Determine what you need and what you want, then cut back where possible. Can you live without some of what you want to free up cash to pursue those short- and long-term financial goals?
Break down your budget. A good rule of thumb is to put 50% of your budget toward fixed expenses, 30% toward variable or flexible spending items, and 20% toward your goals. Whatever formula you use, make sure to build in a smart savings plan, especially if you’re setting money aside for long-term goals. Berkshire Bank offers interest-bearing savings accounts, money market accounts, and certificates of deposit to help you make the most of your money.
Be diligent. Once you identify ways to save, set monthly goals for each category. You’ll need to keep an eye on your spending over time for your efforts to pay off. Whether you choose to save a receipt, send yourself a text, or make a note in your budgeting app, get in the habit of documenting every expenditure. The very act of monitoring your spending may make you think twice about buying things you don’t really need. Check in with your budgeting software to track your progress at regular intervals. Over time, you’ll sharpen your skills and come up with new and better ways to make the most of your money.
If you’d like help setting up a budget just for you, contact a Berkshire MyBanker.