What Does a Good Budget Look Like?

May 18, 2022 by Spectrum Credit Union

Given the heavy tug of inflation, more Americans today rate their finances a bit more pessimistically than they did a year ago. That’s according to Gallup's annual economy and personal finance poll, conducted last month, in which people identified rising prices as the most important financial issue facing their families right now. If you’ve already done a little financial spring cleaning, now’s also a wise time to give your budget a timely tune-up — by taking a good “look under the hood.” Here are some elements that every budget should have, plus some attributes you’ll want to inspect to avoid misfires for personal budget success in today’s environment.

The “classic” components

What makes a good budget? These foundational building blocks will always form the basis.

Net income. In short, this is the amount you take home each month. Net income is your salary minus everything that’s deducted from your paycheck, such as taxes, retirement contributions and your portion of employer-sponsored healthcare costs. If you’re married, it includes your spouse’s wages, too. This category also consists of money you earn through interest, investments or side gigs.

Fixed expenses. These are your essential and constant costs — those that are necessary, mandatory and stay the same from month to month. Examples are the mortgage or rent, car payments, insurance premiums, property taxes and homeowners association fees. An easy way to judge: If you can’t change what you pay each month, then it’s a fixed expense.

Variable expenses. These costs may also be necessary, but they vary from month to month. Examples include utilities, groceries, gas, phone service and medical bills. Unlike fixed expenses, variable costs are more unpredictable, but some of them can be more easily controlled than others.

Discretionary expenses. Next are the nonessentials. In a word, these are wants. Examples could include dining, entertainment, recreation, subscriptions, travel and vacations.

The takeaway? Income is the launch point from which all other elements of a budget flow. And all expenses aren’t created equal. Count up everything you earn, budget for fixed expenses first, and then decide how much you can devote to the flexibles.

The “realistic” features

How do you fine-tune a good budget? Inspect it regularly in order to see the difference between your plan and reality, and think about applying the “SMART” framework to make it more successful.

Specific. With a defined budget in place, you can be more strategic about spending, saving and goal setting. That can mean targeting a specific area for improvement or making a plan to assign savings to different “buckets” for different purposes you choose.

Measurable. Accuracy is important for realistic budgeting and tracking progress, whether it’s income or expense categories. What if, say, your income is irregular? Try basing your monthly budget on the average amount you make each month.

Attainable. Here’s where realism comes in once again. A good budget must be doable and achievable. Even if it’s achievable, does it make sense in your situation? A budget must be based on an honest picture of money coming in and money going out. Only then can you make reasonable changes and match current income and expenses to needs, wants and goals.

Relevant. What are you hoping your budget will accomplish for you? By making it relevant to your financial life, you’ll see valuable opportunities to manage your money in ways it can have the biggest impact. For example, say you're hoping to reduce debt and see that more of the budget is taken up with payments on high-interest credit cards. You could consider consolidating that expensive debt into a customized personal loan at a much lower rate to save money and simplify the payment schedule.

Timebound. Budgets are typically created using monthly data. But that timeline isn’t set in stone. Perhaps setting weekly or quarterly budgeting goals are more effective for you.

The takeaway? You can use the acronym of SMART over and over again to test, and if necessary, adjust your plan.

Sparking the power of a personal budget

Just like your financial situation, your ideal budget is unique. But creating one is the only way to see if you’re spending money the way you think you are, making adjustments as income or expenses change and keeping bigger financial goals in view as well.

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