How a money management newbie learned how to make a budget by following a few easy steps.
As someone who has been living paycheck to paycheck for years, I’ve recently embarked on a project to begin saving toward twin goals: an emergency fund and my retirement. I would like to get something saved up for the short term in a good high interest savings account so that I can eventually open an account at an investment brokerage for my longer term investments.
The first step in doing this was to figure out where my money was going (turns out it was going to my shoe collection and to my booty via the neighborhood restaurants). The next step was to build a budget to help me stop the mass exodus of dollars from my wallet. I had tried budgeting in the past without success. This time I started with a little research and found that I hadn’t put enough forethought into the process in the past. Here’s a summary of what I learned:
How To Make A Budget In 10 Simple Steps
- Track your expenditures for a period of one week to one month. Record every cent that you spend. It’s important to know where your money goes before you set about building a realistic budget. You also need to make a list of expenses that, while not regular monthly bills, occur periodically and must be accounted for (i.e. vehicle registration, property taxes, medical co-pays, etc.). These irregular expenses may be tougher to determine, but try to determine a realistic estimate. This could mean organizing your financial statements, checking your income sources, as well as your outflow. Some people may decide to use budgeting software or decide to do things more manually. Either way is good: just find out which method is most comfortable for you to try.
- See how your current expenses stack up against your current income. You need to see where your money stands before you can do anything. Check your fixed vs variable expenses as well as your income each month. Tally your monthly income vs your monthly outflow. Try to prioritize the items.
- Make decisions about your budget. Once you’ve gathered the information, it’s decision time! Could you do without the data plan on your cell phone in favor of the basic voice service in order to save $40 each month or $480 per year? Must you have both Netflix and HBO? Does your dog need a monthly trip to the groomer, or could you bathe him at home? These are the types of questions you will need to ask yourself. While you’re doing this, consider the structure of your budget. How are you paying your bills? Most pre-designed systems are designed on a monthly budget cycle. For many people, this works. Personally, I’ve built my budget on a bi-weekly cycle, as this is how I’m paid. For instance, my husband and I alternate paying our $750 rent each month. So every two weeks, I budget $187.50 toward rent. At the end of two months, I’ve got my full rent payment already set aside.
Build your budget. Once you’ve decided what you will spend your money on and how your budget will be structured, it’s time to create your plan. Whether on paper, in a spreadsheet, using personal budget software such as YNAB (You Need A Budget) or Mint.com (it’s FREE!), the method that is most comfortable for you is the right method. Be sure to include:
- Net income
- Savings and investments — This is the first subtraction from your net income because, cliched as it may be, you really do need to pay yourself first.
- Non-discretionary expenses — Necessities such as mortgage/rent, food, utilities, debt repayment, and the like. Don’t forget about those irregular expenses, too.
- Discretionary items – Non-necessities such as dining out, entertainment, pocket money, etc.
Remember, you don’t have to give up everything that you want just because you’re trying to save money. Much like going on an extreme diet may eventually lead to a fried food and candy binge, trying to live by an overly restrictive budget may eventually lead to overspending and a shopping binge. So keep your numbers as realistic as possible.
- Now do the math. It’s quite straightforward: subtract your anticipated expenses from your net income.
- Do you have a positive number at the bottom of the page? Great! Add that leftover number to either the savings/investment or debt repayment categories.
- Got a negative number at the bottom of the page instead? Don’t freak out. Have you been too generous with yourself on the grocery budget, or in any of the discretionary categories? Is there something that you’ve been categorizing as a necessity that really isn’t? Tweak the numbers, as needed, to correct these issues. Dealing with a budget may mean doing some adjustments here and there until you come up with a system that you can work with for the long term.
- Review your budget and make sure it’s realistic. If you’re still seeing red, it may be the case that you’re finding it hard to live below your means. If you’re not earning enough to cover your necessities, then you’re going to need to get tough with yourself. Cut out anything that isn’t necessary to survival: cable or satellite television, Internet access, smoking (or other vices), eating out, etc. As you make these decisions, you should then terminate accounts, change service plans, and/or take other needed actions to effect the necessary changes. You may need to consider a career change to increase your salary or take an additional job for the extra income. You may also need to swallow your pride and seek help from family, friends or a local aid agency, especially if your situation places you or your family’s health and/or safety in jeopardy.
- Take your budget seriously. Once you’ve got a working budget, treat it like a living, breathing member of your family. Pay attention to it regularly to make sure that it still paints an accurate picture of your lifestyle. Tweak the numbers as necessary. For instance, you may want to budget more toward groceries during the holidays, but find that you can afford to trim entertainment expenses since you’ll be spending more time at home with family. Watch out for upward creeping numbers as well, as these can often indicate that an old habit, like swinging through the drive-thru for breakfast a couple of times per week, may be sneaking back in.
Above all else, don’t beat yourself up if your spending isn’t budget-model perfect every month. Expenses happen, and the purpose of the budget is not only to keep you on track with your saving or debt elimination goals, but also to help you weather the unexpected.
Once you’ve got some money freed up, you may want to check out some high yield investment opportunities for those funds.
Copyright © 2009 The Digerati Life. All Rights Reserved.