Woman Saving Money with her Personal Finance Budget

Jan 29, 2016 / Money Tips

Financial Firsts: Create a Personal Finance Budget

Ah, budgets. They sound like work. They sound like math. They sound like you probably won’t be able to go to the movies this weekend.

But none of that is true. Okay, the math part is true – but doing a little bit of simple math now will pave the way for a financially secure future down the road. Sticking to a budget will help you increase your savings, prevent overspending, and still have plenty of fun without being hit by overdraft fees or racking up credit card debt.

Here’s how to set up a personal finance budget you can live with in just a few easy steps:

1. Figure out what you spend.

You can’t create a budget if you don’t know what you spend. To get started, use your bank’s PFM (personal finance manager) within Online Banking to look at your transaction history. Most apps will automatically categorize your transactions, but there may be a few that still need divided into categories so you can assess your spending habits. Here is a list of general categories that should cover most of your recurring costs:

  • Rent or mortgage payments
  • Utilities – internet, electric, gas, water, and more
  • Auto – insurance, gas, and maintenance
  • Medical – insurance, copays, and prescriptions
  • Education – tuition, books, or student loan payments
  • Credit card payments and fees
  • Everyday basics – groceries and personal care items
  • Leisure and “extras” – hobbies, gifts, and vacations

To get a realistic picture of your spending, look at three months’ worth of transactions. Your spending likely isn’t as consistent as you think – it will fluctuate from month to month due to holidays, birthdays, vacations, and other inconsistent expenses.

Also, don’t forget to include every bank account and credit card that you use. If you’re only reviewing your checking account transactions but several of your utilities auto-bill to your credit card, you’ll miss a substantial portion of your spending.

We recommend designating one card, preferably the debit card associated with your checking account, as your primary payment method. This will make it easier to track what you spend, as well as help you avoid accruing interest or fees like you might with credit card purchases.

2. Create a budget you can live with.

When creating a budget, it’s tempting to want to put your best foot forward and pinch every penny. But setting unrealistic expectations will only leave you disappointed when you balance your budget.

It’s better to be firm but reasonable. Give yourself wiggle room and build a cushion into your budget that allows for a few meals out or a spring break road trip with your friends. This way, you’ll be able to stick to your budget without kissing your hobbies or social life goodbye.

On the flipside, hold yourself accountable and keep your financial future in mind when you create your budget. If all your money is going toward leisure activities and you’re not paying off debts or funneling cash into your savings, you’ll regret it later.

Note that your budget will evolve with your lifestyle and income. Each time you take a new job, get a pay increase, finance an appliance, or make another life change, it’s time to reevaluate your budget and adjust it if needed.

3. Expect the unexpected.

Rainy days happen, and typically when they’re least convenient. Make sure you’re prepared for them by stashing some extra cash in an easily accessible savings account. When you do find yourself with a blown tire, sprained ankle, or broken window, you’ll be able to focus on the problem at hand rather than stressing out over how you’re going to pay for it. And you’ll be able to do so without maxing out a credit card, taking out a loan, or borrowing money from friends or family.

Another way to stay covered is by setting aside some of your budget for GAP or Payment Protection insurance. Policies like these are often inexpensive but can save you thousands if you are faced with unexpected challenges.

GAP, for example, covers the difference between your car’s value and your auto loan amount. If your car is severely damaged in an accident, GAP will keep you from having to make payments on a car you can’t drive. Like GAP, Payment Protection can save you a bundle. If you become ill or injured and can’t work, Payment Protection will make loan payments for you until you’re back on your feet.

Paying slightly more in premiums for extra measures like these can keep you from being broke for months on end or incurring considerable debt.

4. Pay yourself first.

This is a tried-and-true proverb in the personal finance world for good reason. If you don’t prioritize your savings, you’ll always find somewhere else to put that money – only to later realize that you don’t have any financial cushion or long-term security.

To avoid being financially sidelined by the kinds of surprises we just talked about, consider putting some of your money into high-interest savings plans like money market or term deposit accounts in addition to your traditional savings account. Stashing money in these high-yield accounts enables you to build financial security and take advantage of the compound interest. In other words, your money grows faster just by sitting in a high-yield account than it does elsewhere.

5. Use credit cards to build credit, not to bridge your finances.

If you’re using a credit card to make ends meet each month, it’s time to switch up your routine. As we mentioned earlier, it’s best to use your checking account as your primary source of funds.

Your credit card should be used regularly, yes, but you should be able to pay off the full balance each month. If you’re racking up debt on your credit card without paying it in full, you’ll pay substantially more interest over time and you may decrease your FICO score. A healthy credit rating will open the door to better options for car, home, and business loans so use your credit card responsibly.

We recommend that you shop around before applying for a credit card. Each card offers different rates, rewards, and fees so it’s best to make sure the card you choose fits your lifestyle and financial goals. For example, if you like to travel, consider opting for a Visa credit card that offers unrestricted travel.

6. Motivate yourself by setting goals.

You’re more inclined to build financial security if you set goals for yourself. Like any target, you must have it in sight if you want to hit it.

Start off by setting small goals for yourself and incorporating them into your budget. You could aim to increase your savings by $1,500 this year or pay an extra $30 on that new washer and dryer set this month. Once you’re comfortable setting and reaching smaller goals, think long-term. Open an extra savings account and start working toward a down payment for your first house, or calculate how much it would cost to launch a small business and start making that great idea a reality.

The more comfortable you get with creating and sticking to your budgets, the more you’ll be able to reap the rewards of a financially secure lifestyle. And, yes, you’ll even have some cash leftover to splurge on a premium ski pass next year.

Ready to kick off 2016 with a better budget? Utah First can help you with all your financial firsts. Tell us what your goals are and our financial experts will tell you all about your best checking, savings, credit card, or loan options. Get started online with just a few clicks, or call us at 800-234-0729.