Get Your Budget Back on Track

Introduction

A budget is a great tool for keeping your personal finances in order, getting (and/or staying) out of debt and meeting your financial goals.

But life can be unpredictable. Maybe you have a sudden emergency that needs solving now. Or what used to be an occasional expense here and there has become a recurring cost.

Regardless of how your budget originally derailed, it’s essential to make one that works in the current moment to avoid falling into a debt spiral. So, let’s cover the steps you can take to get back on track financially.

Assess Your Financial Situation

Before you start the work of getting back on track, there’s one important step to take: Be kind to yourself. These things happen and you can’t anticipate every rough patch or curveball life throws your way. You had a working budget once, so you can do it again.

You ultimately want to spend less than you make, so those are the two things you need to know. So first, make a note of your typical monthly income.

From there, get an honest picture of your spending. Carefully track your spending for a month and see what’s essential and what you can cut back.

What are your wants and needs? Which costs are fixed, and which change month to month? What are the true one-time expenses and what are the patterns? Make note of these things, because they’ll help you build your new budget.

Choose A Budgeting System

Now that you know how much money you have coming in and going out, the next step in getting back on track is making a realistic budget based on those numbers.

But a budget isn’t a one-size-fits-all affair. If your previous budget wasn’t quite working for you, you might want to consider different approaches.

Start with the budgeting system that best works for you. Three common systems are the envelope system, 50/30/20 and zero-based budgeting.

Using the envelope system, you identify the categories you typically spend money on — think groceries, utilities, entertainment and so on.

You designate an envelope for each category and then set aside enough money in each envelope to cover a month of spending.

Every time you need to make a purchase, you take it out of the appropriate envelope, but once an envelope is empty, that’s it for the month.

This is a good system for people who do well with structure and like physical or visual reminders.

50/30/20 budgeting divides your pay into three broad areas: 50% toward needs, 30% toward wants and 20% toward savings and debt.

Needs can include housing, food and transportation. Wants are fun stuff and little luxuries, like dining out and entertainment. Savings and debt can go toward paying down credit cards and building an emergency fund.

This is a good system if you prefer broader categories while still making progress on your goals.

Finally, zero-based budgeting is based around giving every earned dollar a purpose. When developing a zero-based budget, you list out your expenses for the month, including debt payments and savings goals.

Then, you assign every single dollar you earn to these expenses. Every dollar is accounted for, so when you subtract your expenses from your income, it should add up to zero.

This is a process you’ll repeat every month, so it’s a good option if your expenses change from month to month since you can adjust as you go.

Incorporate A Debt Reduction Strategy

Your budget includes your monthly minimum debt payments. But if you really want to make progress on your debt, you’ll want to pay more than the minimum. This is where debt reduction strategies come in.

One common technique is the snowball approach, which is good for people who get motivated by small wins.

With this approach, you pay more toward the smallest dollar amount debt, while paying the minimum amount on the rest. When that first debt is paid off, you shift the payment you had budgeted for it toward paying for the next debt. And so on. It’s like a snowball gaining size and momentum as it rolls down the hill.

On the flip side, the avalanche method prioritizes the debt with the highest interest rates. This approach will save you more in the long run, but you might not see an obvious impact as soon as with the snowball approach.

Think about which approach best works for you as you create your budget.

Be Proactive With Savings

In most things, prevention is better than the cure. And the same rings true when getting your finances back on track. An emergency fund is one of the best things you can have, but you need it before the emergency.

If you build emergency fund contributions into your budget, you can prevent unexpected expenses from derailing the progress you’ve made in rebuilding.

Choose an amount that works with your other priorities and you can set up an automatic monthly transfer to a high-yield savings account. This way, your emergency fund is safe, accessible and earning interest for you.

Adjust Your Budget As You Go

Once you’ve got your budget ready, remember that you can — and probably should — adjust it as you go.

Perhaps you underestimated a certain category or realized it was easier to cut back in an area than expected. Maybe your circumstances changed not long after you found your budgeting groove.

Whatever it is, it’s totally alright. Just take a bit of time to adjust your budget to reflect reality, so it can do its job.

Bottom Line

No one likes to feel like their plans were derailed, especially with finances. But budgetary challenges can happen to anyone, so it’s good to have a plan.

Luckily, with a little bit of work, renewed focus and a willingness to adjust as you go, you can build a new budget and get back on track soon enough.