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5 steps to balancing your budget

By Kemberley Washington · Bankrate.com
Thursday, March 14, 2013
Posted: 10 am ET

It doesn't take an act of Congress to balance your budget. You just need a commitment to financial goals, determination to live below your means and a willingness to make the necessary adjustments.

Here are five ways to do it.

1. Establish your budget

Before creating a budget, review your financial history. Using bank and credit card statements, identify both how much income you take in, and how much you typically spend on expenses. Compile the financial information into two separate categories: expected income and expected expenses.

Expected income should include wages, self-employment income, investment income and other sources of income. Next, list expected expenses such as mortgage or rent, utilities, and cable and cellphone costs.

Lastly, subtract expected expenses from expected income to determine the amount you have available after expenses are paid. The available amount should be put away for rainy days, used to pay down debt or applied to other financial goals.

2. Separate the necessities from the wants

Further separate your expected expenses into two additional categories: discretionary expenses and nondiscretionary expenses. Discretionary expenses are simply "wants," such as entertainment, dining out or gym memberships. Nondiscretionary expenses are necessities, such as rent, utilities and groceries.

Review discretionary expenses to see whether you can identify costs that could be eliminated or reduced.

3. Track your expenses

Periodically update your budget to list the actual expenses for each category. Compare budgeted amounts with actual spending.

If you are tech-savvy, use smartphone budgeting applications to help you keep track of expenses. Or, if you enjoy recording the old-fashioned way, keep a notepad to document your expenses.

4. Review and adjust frequently

Prepare a budget at the beginning of each month or every pay cycle. This gives you an opportunity to review your prior month's budget and identify areas where you need to control spending. Make any adjustments necessary to help you reach financial goals, such as saving or reducing debt.

5. Budget for life's pleasures

Consider planning for certain indulgences, such as date nights, or a new dress or pair of shoes. Planning ahead of time will help you understand what you can afford, and also serves as a reminder to treat yourself every now and then.

Your budget is a work in progress. Commit to your budget and make adjustments to ensure you create a budget that works for you.

Remember: your choice, your future!

Kemberley Washington is a certified public accountant and business professor. She writes a personal finance blog at Kemberley.com. Follow her on Twitter and on Facebook.

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