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A budget is a plan, an outline of your future income and expenditures that you can use as a guideline for spending and saving.

Only 40 percent of Americans use a budget to plan their spending. But 60 percent of Americans routinely spend more than they can afford. A budget can help you pay your bills on time, cover unexpected emergencies, and reach your financial goals—now and in the future. Most of the information you need is already at your fingertips.

Start by following the simple steps outlined below to get a clear picture of your monthly finances.

1. Add Up Your Income

To set a monthly budget, you need to determine how much income you have. Make sure you include all sources of income such as salaries, interest, pension, and any other income sources, including a spouse’s income if you’re married. Using the worksheet below, write a dollar figure next to each relevant income source. Make sure that the figure you write down is the amount you receive from each income source on a monthly basis.

If you get a salary, be sure to use your take-home pay, not your gross pay. Taxes are usually taken out automatically, but if they’re not, remember to include them as another expense. If you receive money from somewhere not listed, enter the source of that money along with the amount under "other income."

2. Estimate Expenses

The best way to do this is to keep track of how much you spend each month. The worksheet divides spending into fixed and flexible expenses. If some of your expenses for one or more category change significantly each month, take a three-month average for your total.

3. Figure Out The Difference

Once you’ve totaled up your monthly income and your monthly expenses, subtract the expense total from the income total to get the difference. A positive number indicates that you’re spending less than you earn – congratulations! A negative number indicates that your expenses are greater than your income and gives you an idea of where you need to trim expenses and by how much.

Well done - you’ve created a budget. The next step is to make adjustments to this outline in order to achieve your financial goals. Track your budget over time to make sure you’re on track.

Live Within Your Means

If you are like many Americans, you may find that you are spending more than you're saving and steadily going deeper into debt as a result. This is an easy and common pattern to fall into, and one that requires some planning and discipline to reverse.

The first step is creating a budget. As unpleasant as this may sound, creating a budget is nothing more than examining your income and expenditures in order to determine exactly how much money you have coming in and where you’re spending that money.

Once you've got a clear understanding of your current budget, your challenge is to find places where you can spend less (or earn more) in order to achieve your financial goals. Here are some steps you can take toward that end:

1. Question Your Needs And Wants

What do you want? What do you really need? Evaluate your current financial situation. Take a look at the big picture. Make two lists – one for needs and one for wants. As you make the list, ask yourself:

  • Why do I want it?
  • How would things be different if I had it?
  • What other things would change if I had it? (for better or worse)
  • Which things are truly important to me?
  • Does this match my values?

2. Set Guidelines

We all have different budgets based on our needs and wants. But the Building a Budget chart on the next page shows some guidelines on how much should go toward different expenses. You may need to make adjustments for a daily latte fix or visits to family, but remember to subtract amounts from other areas if you do.

3. Track, Trim And Target

Once you start tracking, you may be surprised to find you spend hundreds of dollars a month on eating out or other flexible expenses. Some of these are easily trimmed. Cutting back is usually a better place to start than completely cutting out. Be realistic. It will help you to be better prepared for unexpected costs.

The SMART Way to Trim Expenses

In finding ways to trim flexible expenses, it helps to have a goal to save toward each month. Setting such a goal needs to be SMART:

SPECIFIC Smart goals are specific enough to suggest action. Example: Save enough to visit Rome for your wedding anniversary. Not just "save money."

MEASURABLE You need to know when you achieved your goal or how close you are. Example: A trip to Italy costs $2,000, and you have $800 saved.

ATTAINABLE The steps toward reaching your goal need to be reasonable and possible. Example: I know I can save enough money each week to purchase that trip to Italy.

RELEVANT The goal needs to make sense. You don't want to work toward a goal that doesn't fit your need. Example: We would like to stay in four-star hotels in celebration of our anniversary.

TIME-RELATED Set a definite target date. Example: I want to go to Italy by next summer.

This chart shows some rough guidelines on how much of your income should go toward different expenses. If you live in an area where transportation is higher than normal or rents/mortgage are higher, you may need to make adjustments. Also, if you would like to add a section for gifts, or something else, then you'll need to subtract from another area.

Budgeting: Back-to-School

Ah, back-to-school time: the smell of newly-sharpened pencils, fresh crayons, and flowing cash. If that third one's got you down, take a look at these tips for creating - and sticking to! - a back-to-school budget.

Start early, and take time to get ready.

It doesn't take much to turn the school's supply list into a full-on shopping list. But you can do better than that.
Before you buy even one notebook, estimate how much you can afford to spend overall and what the costs are likely to be. Don't leave anything out! It's better to know ahead of time if things will be tight. (Keep reading for a bunch of creative ways to handle a shortage.)

Give some thought to what you'll do with any extra money in the budget. Will the kids get something special from their mile-long wish-lists? Or will the surplus be added back into the household budget?

Think ahead to find the best deals. Be on the lookout for the big back-to-school sales and go early! Even the big stores can sell out at the last minute.

How realistic is your budget? Try our back-to-school calculator to find out!

Get the kids involved.

And not just with the shopping. Have them join in as you prepare: They'll learn great lessons about budgeting, finding a good deal, and the difference between wants and needs.

Younger children can help cut coupons (with safety scissors, natch). And older kids can compare costs and tally them up. You might even put them in charge of looking for deals to stay under budget.

Be willing to compromise on a few things.

Sure, kids will want to have the same cool stuff their friends do. If your budget has the room, you can help them learn to prioritize.

Talk to them about how choosing a more expensive item means they'll have to go cheap on another item, and give them a chance to think their choices through. If they have money of their own, you might ask them to help fund that special lunch box or name-brand backpack.

Get creative to slash the shopping bill.

There's a good chance school clothes are the biggest chunk of your back-to-school budget. But who says they have to be brand new? Trade clothes with other families, or hit the thrift stores and garage sales. If school uniforms are required, check whether the school has a trading or discount program.

Buying online? Play it smart! Order together with enough friends to get free shipping. Or buy bulk packs of supplies to share. You might also find a steal on eBay or Craigslist.

Learn from the experience.

Make your savvy back-to-school approach an annual tradition. Keep track of this year's expenses to help figure out the budget next year. Keep notes about what you discover, like where the best thrift stores are and when the store shelves start to empty. They'll come in handy a year from now.

Practice these smart shopping habits each year, and by the time the kids graduate, you'll have saved a bundle. And they'll be much more prepared for the real world.

4. Learn to manage your money and your life


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