How to Set Up a Budget and Stick to Your Savings Plan

If your spending is out of control and your debt is increasing each month, it’s time to get back to the basics of budgeting.

Does even the mention of the word “budget” stifle your lifestyle? Keep an open mind because sticking to a budget doesn’t have to be an anxiety-ridden experience. Think of it this way: A novice baker wouldn’t attempt to whip up a souffle without first consulting a recipe. Your budget is your recipe for a successful savings plan.

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Before you start cooking up money making schemes to earn fast cash, learn about how you can set up and stick to a budget even in the face of temptation.

Setting up Your Savings Plan

Creating a budget in the most generic terms comes down figuring out your net income minus your expenses. How much money do you have coming into your household after taxes and other deductions, including your health insurance and 401(k) contribution? Subtract that amount by your fixed and variable expenses.

Fixed expenses are your rent, mortgage, real estate taxes, insurance, car payments and debt. Cutting back on these expenses is trickier than budgeting your discretionary bills. But, in theory, you could rent a cheaper apartment or refinance your home loan, so it’s not impossible to reduce fixed expenses.

Variable expenses include groceries, vacations, entertainment, dining out and other bills that vary in cost from month-to-month. These expenses are easier to trim, provided you have the willpower to cut back.

Budgeting Goals

After you’ve ironed out your income and expenses, identify your financial goal. Why are you budgeting? Maybe you want to lower your debt. Debt is a huge percentage of every household’s budget and it is increasing, according to the Federal Reserve Bank. Total household debt rose from $114 billion to $12.85 trillion as of June 30. Eliminating your debt should be a priority considering the interest you incur.

Establish a clear budget goal with a deadline to achieve it. Let’s say you want to pay off your student loans. How much of your discretionary spending do you need to cut to have extra cash to pay off your student loans within two years? Having a clear goal will enable you to keep focused on your savings plan when impulses to spend arise.

You may also want to reconsider refinancing your loans. This could help you save money over the lifetime of the loan if you are able to secure a lower interest rate. Or you could simply restructure the loan in a way that lowers your monthly payments, freeing up cash to put elsewhere.

To help you stick to a set budget and savings plan, track everything you buy. Bank account statements are useful to evaluate where you’re overspending. Write down your expenses, type them in an Excel sheet or use any other method that will keep you accountable to you savings goal. There’s also the budget app Mint, which is like having money manager with you to pay your bills and track your cash.

Sticking to It

You’ve set up your budget, now how do you stick to it and avoid dipping into your savings or using credit cards? On the journey to saving money there will be temptations. One night you may be invited to an expensive restaurant with friends when you’ve already budgeted to eat leftovers at home. What do you do? Another night your favorite rock band is reuniting at Madison Square Garden and the only available tickets are $1,500. Or suppose you’re invited to a destination wedding in Mexico. You could say adios and use credit cards or pull cash from your emergency savings. But short-term gratification is just that: short term.

Budgeting is about sacrifices and deciding between your wants versus your needs. This means eliminating impulse spending. You want to enjoy a meal at a ritzy restaurant with your friends, but your budget doesn’t allow for it. Make compromises. Skip paying for pricey appetizers, dinner, drinks and dessert with your friends. Instead stop by early just for drinks or ask your buddies to make dinner at your place on another night. As for that rock concert, watch a show on TV and put the money toward your debt.

Declining a wedding RSVP can be complicated, especially if it’s a close friend or family member. Weigh your finances carefully. How long will it take you to pay off the trip? Will it be worth it a year later when you’re still paying it off? When in doubt, always make smart decisions that benefit your savings goal.

Resist Temptation

It’s easy to get sidetracked from your budget when you feel deprived. Sticking to a budget means getting out of debt and ultimately having more freedom. So reward yourself along the way to keep up your spirits. Pad your budget to allow for little rewards like a reasonably-priced dinner, a morning coffee or a movie night. You risk failing completely if you’re extremely frugal. A sustainable budget, much like a diet, has to be a slow lifestyle change.

To further resist temptations, unsubscribe from retailer newsletters and emails. Being bombarded with enticing advertisements for new shoes, jewelry clothes and vacations can deter you from your goals.

Do you have any budgeting tips for your fellow AAA members? Let us know what works for you in the comments section below. You can also check out the AAA Deposit Program for accounts that might help you save.