How setting up a budget can help you through tough times

Budgeting helps you manage your money by giving you a closer look at the choices you’re making and provides guardrails and guidelines for your financial decisions. 

• If you receive a stimulus check or tax refund, having a budget can help you decide what to do with it. (Don’t forget the federal income-tax deadline extension to July 15, 2020.) 
• If you owe taxes, a budget can help you figure out how to cover them. 
• When you track your monthly expenses, you can see where you might have some unnecessary or less important spending that you can cut back on.
• Reviewing payments can also help you spot the need for a better deal for internet, cable, newspaper, or phone service—providers that may be willing to reprice, rather than lose, a customer. 
• If you’re having a hard time making payments, consider contacting your providers to see if they can help you with a longer payback period or better terms. 

You can create your budget on a piece of paper, spreadsheet, app, or online—whichever works for you. If your computer has Excel, just open the program, click on “New,” and search for “Budget” (this might differ by computer system). Then choose a template from the budget options and save it. If you’d rather use an app, search “Budget” in the Apple App Store or Google Play and read the reviews to decide which will work best for you. Now you’re ready to get started.

First, estimate your income

Add up all of the income you receive each month. When you look at your paycheck, focus on take-home pay rather than the amount you make before taxes, since that’s the amount you can spend or save. Other income might include your spouse’s paycheck, bonuses, rent from a property you own, or dividends from stocks in your personal portfolio.

Then track your expenses

To see where you’re spending, review your bank and credit card statements for the last three to six months. (Many online banking and finance programs let you download your spending history into a spreadsheet, making this process even easier.) Next, divide your expenses into basic necessities and discretionary spending (all the nonnecessities). You may be surprised that the basic necessities of food, clothing, and shelter account for about two-thirds of the average person’s income.² 

Next, do the math—income minus expenses

When you subtract your expenses from your income, you should get a good idea of how you’re doing. If the difference is positive, there’s a good chance you’re saving money that you could invest or save as cash. If the difference is negative, you’re likely spending more than you’re making and should look for expenses you can cut. If your income fluctuates, it makes sense to save more in higher-income months so you can better handle lower-income periods.

Ask, “What changes can I make?”

Once you know whether you have money to save or need to cut back, you can fine-tune your spending by eliminating or lowering unnecessary costs. After you’ve made those adjustments, you have a budget to follow. Remember to revisit it periodically and make the necessary modifications, as circumstances change over time.

Consider debt and emergency savings

Debt often signals financial stress—in fact, 59% of workers acknowledge that their debt is a problem, with one in five saying it’s a major problem.³ When you go through your spending, be sure to take a close look at your debt levels. How much are you spending on credit card fees and interest? Do you have any loans that have high interest you could try to lower? Many credit card and other companies will work with you to reduce your payments or your rates, so give them a call. Lowering those fees and interest rates means you get to keep more of your own money. As you go through your budget, look for ways to cut your debt and related payments. 

Even if you don’t have the ability to start an emergency savings account now, make it a priority when things get easier. Having a cash buffer to handle your fixed monthly expenses or act as a safety net for unplanned expenses, such as a major household repair or medical emergency, can help you avoid using credit cards and borrowing money—or tapping into your retirement savings—when times get tough.

Basic budgeting concepts also apply to planning for your retirement, whether it’s 5, 10, or 25 years away. By thinking about what type of lifestyle you’d like to have in retirement, you’ll be better able to determine how much money you’ll need. You can also estimate how much income, including Social Security, you’ll have. And finally, if you have a gap to fill, you can look at options, including increasing the amount you’re saving through an employer plan or IRA.

If your finances are a cause of stress or leave you feeling a little out of control, budgeting can help you regain confidence and control. By understanding how much of your money is going to necessities versus nonessentials, you can start making more deliberate decisions about what to prioritize and possibly reduce expenses along the way. Taking these steps now can help you make a habit out of managing your money more closely, putting you in position to reduce your financial stress and even save more for the future.