Before creating your budget, get a clear picture of how you actually spend right now by tracking all of your expenses for a month or two. This means saving your receipts and logging everything you spend – from a can of soda to new shoes.
After a month or two, take a look at your log. How well do your current spending habits represent your financial goals?
Making tradeoffs may mean giving up things you can do without, or buying something less expensive in order to afford the things that are most valuable to you.
Let’s say you spend $2.50 on a latte every day. A month’s worth of lattes is costing you $75. And maybe you’re okay with that. Or maybe there’s something else you’d rather spend that $75 on. Your budget will allow you to make decisions and decide what tradeoffs you want to make.