Did you know that approximately one in three Americans keep and follow a budget each month? This means that the majority of the country does not budget their finances. I believe that there are two main reasons that people do not create a budget – the first being that they do not know how to start a budget and the second being that they are scared what creating a budget will tell them about their financial situation. Today I am going to talk about how to overcome the first problem. Below are my five easy steps to start a budget!
1. Calculate an accurate number for the amount of income you are bringing in on a monthly basis.
Everyone has a different situation when it comes to monthly income. Whether you have one or multiple incomes and if it is a fixed or variable income, I would venture to guess that everyone has a base income number.
Eventually, you will want to come up with a definitive way of tracking your budget, but for now I would just ahead and take out a piece of paper and pen or pencil. If you want to get real fancy, open up a spreadsheet – this is where I started and still start my budget each month. If you want to check out my FREE Budget Spreadsheet, you can download it below.
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Calculate how much base income your family brings in on a monthly basis. Do not include expected overtime or bonuses at this point.
- If you are paid strictly twice a month or once a month, this is fairly easy – either you are paid once and so you already have your monthly income or just multiply your paycheck by two if you are paid twice.
- If you are paid every other week or every week, you have two options:
- assume there are 4 weeks in a month and multiply your weekly income by 4 or your biweekly income by 2 (you will have two extra paychecks a year in this scenario to account for)
- or on the months where you get paid 5 or 3 times (respectively) just know that you will have extra money that month to work with
On your piece of paper or in your spreadsheet, record your monthly income and label it.
Make sure you are calculating your monthly income based off net income, the amount that hits your bank account after taxes and deductions are taken out. Finally, be sure you are accounting for all of your income no matter how insignificant – including child support, babysitting, piano lessons, tutoring, etc.
In our house, my husband is paid every other week. We decided to assume that there are four weeks in a month so we took his paycheck and multiplied it by two to get our base salary.
2. List out all mandatory bills, expenses, and debt payments – these are the items you have to pay or cannot live without.
Underneath your net monthly income, list out each and every expense you have that you have to pay no matter what. These would be items like mortgage/rent, utilities, debt payments, groceries, gas, clothing, etc. Make sure you include the name of the expense and the amount you usually spend on that expense per month. If you are unsure how much you spend on an expense each month, take a look at the last month or couple months if you have access to that information and tally it up the best you can. If not, make your best guess. In time, you will know exactly how much you spend in each category.
I am a total believer that savings should fall into this category, but I understand that some people don’t have any money left for savings. If nothing else, it should be in this category until you have at least $1000 saved for emergencies, and then for SURE if you have no debts other than your house. We are currently following Dave Ramsey’s baby steps and this is Baby Step #1.
3. Consider any savings accounts or investments that you are currently contributing to.
Once you have figured out all the expenses that you have and need to live, it is time to look at the money you are putting towards savings and investments – retirement and non-retirement. If you are currently following or are interested in following Dave Ramsey’s method then he does not recommend putting any money towards any of these categories until you are debt free besides your mortgage (except for a $1000 emergency fund – mentioned above).
If you are already debt free or do not care what Dave Ramsey says (your choice) and want to continue to save and invest while paying off debt, then go ahead and list out those accounts that you are currently contributing to or have contributed to in the past.
If you have a pre-tax contribution coming out of your paycheck for retirement or Health Savings Account then I would not worry too much about those, maybe just list them so that you remember you have them. Otherwise, brainstorm any accounts that you have money including college savings plans, mutual funds, stocks, IRAs, old 401s, random savings accounts, CDs, etc.
Next to each account, list out the amount you are currently contributing or the amount you would LIKE to contribute towards a savings or investment goal. Once you have finished that, feel free to move on to the next step. Don’t worry if you feel you do not have enough money to meet your goals, we will be balancing the budget at the end.
4. List out all discretionary expenses, or things you would like to spend money on.
Discretionary expenses are the things that everyone wants to spend money on and usually the culprits for going into debt. These expenses include eating out, traveling, shopping, etc. These are all things you can live without and therefore they should be the last expenses added to the list. Try and think of every single thing you spend money on regularly. If you know that you get coffee everyday on your way to work, write it down. If you get a manicure or pedicure each month (or week), write it down. Leaving out these seemingly small expenses will hurt you in the end – they add up quickly! This exercise is supposed to help you realize where your money is really going so there is no point in trying to lie to yourself here. And just because you write it down does not mean that you have to keep it in your budget if it is a habit you are trying to break.
I LOVE donuts. We happen to have two really awesome donut shops in Fredericksburg. I realized I was sometimes going out to get a donut (or two!) 2-3 days a week! This was definitely an expense that I needed to cut from my budget and now I go for special occasions and it is that much more enjoyable.
5. Balance your income with your expenses.
Once you have a list of all your expenses (do one last check to be sure you have not missed anything!) you need to start subtracting your expenses from your monthly income. This is where an Excel spreadsheet comes in handy (download below!). A calculator works just as well though 🙂
If you end up with $0 or a positive number – congratulations, you have a balanced budget! If you have a positive amount left over I would go ahead and allocate that extra money to debt first and second to savings if you have no debt. This is also what you should do (in most cases) with any extra money you might make in any given month due to overtime or a bonus.
If you end up with a negative number after subtracting all your expenses, then take a deep breath and do not panic! It just means you have a little more work to do.
Review how much you are spending for groceries, eating out, shopping, and entertainment (movies, concerts, trips, etc). Do any of these numbers seem too high? If so, go ahead and lower the amount to a number that is realistic (don’t go so low that you are doomed to fail!). If you still have a negative balance, go through every single expense and see where you can make cuts. Do you really need to have cable, Netflix, Hulu, AND Amazon Prime? Do you have debt payments to make and still trying to put money into retirement or college savings? Consider cutting out the extra savings and investments until you have your debt under control.
This is a snapshot of your CURRENT financial spending but there is no reason that it cannot change.
The best budgeting course of action is to budget month-to-month. This means that each month you will create a “new” budget. You will use your the list of expenses that you created in the last two steps but you won’t necessarily have an actual expense for each category every month. For example, maybe last month you spent $150 on clothes. Does that mean you have to spend $150 on clothes this month? No, it does not. Either reduce that amount to something lower OR reduce it all the way to $0 for this month if you don’t plan to go clothes shopping. Follow this rule for all of your discretionary expenses.
This is probably going to be the hardest step in the entire process. It can become emotional and hard to let go of certain discretionary spending. Take a couple days to think about it and discuss options with your spouse and remember – if you decide to cut something out and it does not work, you can always evaluate the next month and try something else! I used to have a hard time when I would go over budget in a certain category because since I had set that amount when I created my budget I felt like I HAD to make it work. I recently realized that if it isn’t working then I just need to re-evaluate and try something else. Maybe there is a different area where I can cut some money out or a different strategy for saving money – my budget is always a work in progress!
Congratulations! You completed the hardest step – you created a budget! While you may have hated the whole process and feel like your life is going to be lame and boring now, I promise you that after a few months of practice, you will feel a freedom to spend money – as long as it is budgeted 😉
Once you have finished this exercise, move on to the next step which is planning your monthly budget, also known as conducting a monthly budget meeting.
Do you have a budget?
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