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Living by a budget can sometimes sound dirty. It can sound like something only people with low income do. However this couldn’t be further from the truth.
The reality is organization is the key to success in every aspect of life, particularly finances. While it may not be the sexiest topic, the most successful of people typically live by a budget.
When you are working on your budget, we recommend allocating about an hour to the process. This is something you will want to take your time doing and be able to devote your complete attention to.
If you have a partner in life where you are working on common goals or share money, make sure this budget is done in a group setting so you are both on the same page as to what is expected with the budget.
There are many different ways in which you can create your budget. While a good old fashioned notebook and pen works great, there are much easier ways of creating this.
Creating a virtual budget is much easier in the long run because you can easily compare your savings and adjust your numbers as needed. This also works because there is less chance of you misplacing your plans. For creating your budget try using an excel spreadsheet. The grid plan makes budgeting even easier.
If you don’t have a Microsoft Office account try signing up for a google docs account done through your gmail account. Here you can use their sheets app to create your budget. As a bonus, you can share it with your partner so that you can be on the same page financially.
We know the power of living your life with a strong budget by your side. We believe in it’s ability to help you save money and reach all your goals. For this reason we have outlined all the steps needed to build a quality budget that you can actually live by.
Following these steps you will reach your financial goals in no time. So, square away an hour time, get comfortable, grab your computer and get ready to start reaching all your financial goals. Good luck!
1. Determine Your Monthly Income
To start, determine your expected monthly income after taxes. This can be hard to do, especially with a job where your hours aren’t fixed but getting as accurate of an estimate as possible will prove infinitely important.
To make this easier look at your pay stubs or login to your online banking and check your 5 previous paycheck amounts. Take the average by adding up the 5 amounts and dividing by 5. This is the amount you should use as your monthly income.
This is listed as the first step for two reasons. Firstly and most importantly you need to ensure you are only spending money that you actually make rather than counting on your visas to cover you.
It’s important to live only to your income rather than surpassing that. If you continuously go into negatives you will never get ahead financially.
The second reason that this is first on our list is because it is always good to question whether or not the amount you bring home a month is a number you can comfortably live by.
Oftentimes people are not living to their full potential. This could mean getting a second side job that will earn you a bit extra cash.
Better yet why not check online how much you should be making in your job. A simple google search will show you how much you should be making for your career path. If you are making on the lower side of this bracket or if it has been a while since your last raise why not sit down with your boss and talk numbers?
This doesn’t have to be as scary as you may think. It doesn’t need to be a formal raise request. You can simply ask your boss what you should be doing in order to be moving towards a raise. Sometimes knowing that it is coming can be a good motivation to properly manage your expenses.
2. Outline Your Fixed Expenses
Fixed Expenses are those many unavoidable expenses that are there every month and commonly stay the same amount. They do not change amount or date they are due.
For example, your rent or mortgage payment is often your biggest fixed expense. This is a basic necessity. Having a roof over your head is something you can’t get around paying and it stays more or less the same month after month.
The following are examples of some common unavoidable fixed expenses to take into consideration:
- Rent or mortgage payments
- Car payments
- Utility bills
- Home, car and life insurance
- Service payments (cell phone, internet, cable)
- Tuition payments
- Child support payments
These payments are some that you can not get around paying. It is important to plan for these and account for them first. Logically, it is easy to understand that a roof over your families head is much more important than a $5 morning coffee
While these payments are considered unavoidable, that isn’t entirely true. With every expense you ever make it is important to determine whether or not it is one you actually need.
For example, be sure to reevaluate your cell phone plan. Are you using all your minutes or your data that you are paying for? This is also true with your utility bills. Is there a way you can cut this down at all?
How about signing up for Netflix and ditching your monthly cable bill? This can save you quite a bit of money every month. While accounting for these expenses the key to a healthy budget is to question every dollar that you spend. Is this the best use for your money?
3. Determine Your Financial Goals
It is always important to pay yourself first. That is why it is important to have a firm idea of what your goals are. What are you working towards before you account for further expenses. Use this time to ask yourself a few key questions. What are you saving for? What are your priorities?
Perhaps you are saving up to buy a house. Or maybe a nice vacation is what you are planning. It is important to make sure that you are actively moving towards your goals so be sure to logically think about what is coming next in your life.
Having a plan is the first step in making it happen. Be sure to always have a savings account so that you can continue to progress further in your life.
According to CNBC 8 in 10 Americans are in some form of debt. This could be seen in student loans, credit cards or most commonly with a house mortgage. The article goes on to say “increasingly, people are carrying debt into retirement.”
Paying off debt as soon as possible will save you money in the long run. Every time you dip into credit you are paying the bank for the opportunity to use their money before you have enough.
Credit card debt especially carries a high interest rate. By carrying money on your credit cards you are essentially giving away your money. Sit down with the bank to see if there are ways to consolidate your credit card debt into the much lower interest rate found in a line of credit.
Be sure to always plan for a rainy day. This is a savings account where the sole purpose is to take care of you in case of the unexpected. Planning for a rainy day is something that should be done regardless of your salary or projected future.
Preparing for the unexpected is the best way to get to a comfortable financial state. It is recommended to put as close to 5% of your salary away to a rainy day fund as you can. This small amount will likely go unnoticed but can save you a lot of stress.
Using this in cases like animal care, health emergencies or the event of unemployment is sure to relieve a ton of stress for you.
In addition to your savings and your rainy day fund, be sure to think about pension planning. While this may not be on the top of your mind, it really should be. To start with this, check with your employer if you are eligible for their 401(k) program.
Be sure to ask if they have any contribution match programs. This money will get added tax free which is very desirable. If your company does have this program be sure to get as close to maxing out their match program as possible.
If they don’t be sure to open an Independent Retirement Account (IRA) which will allow you to put away money for your future.
While this may seem like too many expenses to make work with your income, give it a chance. None of these savings plans need to be large payments.
Even a simple $10 payment will accumulate over time to turn into a much larger sum. The important thing here is to agree to pay yourself first, have goals and monitor your money.
4. Look For Upcoming Lump Sum Expenses
Life is full of unknowns. While avoiding these unknowns is often impossible, preparing for them is entirely possible. Some upcoming lump sums are for exciting things such as weddings, babies or tuition fees.
Others may be for more unavoidable upcoming expenses such as new tires for your car, broken plumbing or other home maintenance. Be sure to always be looking into the future with your financial planning.
While one time lump sums can be crippling, if planned for ahead of time then they can become much more manageable.
5. Predict And List Variable Expense
Variable expenses are everything that you are in control of. These can include going out to dinner, grocery foods, gas and entertainment. You may be surprised at how much this adds up to. The easiest way to keep track of this is use your debit card for your transactions.
It will keep track of everything for you. If you have a smartphone the application Mint is one of the top budget apps out there. It links into your accounts, and even credit cards, (it’s safe we promise) and breaks your budget down for you.
You can set amounts for each expense and it will input every expense into a category. This will give you a breakdown for every single dollar you spend.
Seeing where your money goes can surprise you. By seeing that you are spending $400 on clothes a month, for example, will be a wakeup call to ease your spending. In order to be fully prepared for all things upcoming be sure to always include a miscellaneous fund.
This is for all expenses you cannot predict or to cover areas in which you underestimate spending.
6. Total Up Income And Subtract Intended Savings
This is the most difficult part of creating a budget as it will typically require some critical thinking. Take the amount you are expecting to earn (either a month or in whatever term you choose to work in) and subtract all your intended expenses. This will look something like the following:
Expected Income – Fixed Expenses – Pension Planning – Savings – Debt Payments – Rainy Day Fund – Upcoming Lump Sum Contribution – Variable Expenses
Be sure when you do this yourself you go in much more depth as to list what your variable and fixed expenses are as well as what kind of debt payments you are planning to pay.
Once you have subtracted all your intended expenses from your income you will either be left with a positive number, a negative number or you will be bang on budget. This is where the critical thinking comes into play.
Regardless of whether you are coming out positive or negative revisit your variable expenses to see how logical they are for your lifestyle. Is your grocery budget truly attainable or did you perhaps estimate a little low? What about your gas budget? Adjust if you need to then do this step again.
If you come out positive, that’s great! Consider allocating more money to your debt repayment or your pension planning. These are two of the most important areas to focus on. From there, determine your priorities and allocate your resources accordingly.
If you come out with a negative number, be sure to look at your spendings and see if there are areas you can cut back. Perhaps you were over ambitious with how much you could put away to your rainy day fund or you are spending entirely too much in entertainment.
If you are negative a large amount of money, you may want to consider starting a side job to help you meet your goals. The last thing you will want to do is be content increasing your monthly debt.
7. Keep All Receipts
This is a crucial step in staying accountable for all your spending throughout the month. It may take a while to get into the habit of asking for a receipt but having receipts in the end will make it much easier to do the next step of monitoring how your budget is working.
Try adding a post it reminder on your wallet so that every time you pull it out you will remember. It is important to account for every penny spent, even the ones spent with the spare change you found in your car.
Keeping your receipts will allow you to later have a clear picture not only of how much you are spending, but also how you are spending it. It is easy to leave unnoticed the little $2 purchases here and there every month but these can really add up over the course of the year.
8. Monitor Progress
At the end of the month (or bi weekly) dig deeper into your budget by using receipts to note every penny spent in different categories. If you are using an electronic budgeter you can see how well you did at staying within your budget for each category.
This way you can either make a note and spend less or take some money from another variable expense to compensate. This will take some thought and figuring out what is important to you. If you are social person and find your nights are costing too much, find other ways of seeing your friends.
9. Re-evaluate Goals And Spending Progress
Go back monthly, if not more often, to re-evaluate goals and progress and change accordingly.
This is where you should dig deeper and give your expenses a lot of thought. For example if you are a big coffee drinker weigh the pros of investing in a programmable coffee maker and set it to make coffee in the morning. This is an excellent way to save at least $5 every morning. This will add up quickly.
If you are spending more than you anticipated on gas, see if there’s a rewards program you can take advantage of which will earn you cheaper gas or points towards free groceries. Being accountable for your purchases and reevaluating your monthly expenditures will begin to become a habit over time.
10. Automate It
Once you you know your fixed expenses you can setup automated transfers through your bank. For example, if your mortgage (or rent) is $1200 per month and you get paid on the 1st and 15th you can put $600 from each paycheck into a separate account.
You can start to do this with every fixed expense. All this will take is to create a savings account with your bank. You can then get a form to give to your bank so those expenses will automatically come out of that separate account.
This way you no longer have to worry about rushing to the bank or making sure you have enough in your account. It may seem like a foreign idea but the truth is the most successful savers have multiple bank accounts for their different needs.
This is where organization comes into play. If you can pull your fixed expenses into one account and get all your bills automated to be withdrawn through there it will cause much less stress. Now do this same thing with your savings account.
Think of your bank accounts as a virtual piggy bank. Having one piggy bank, or account, can get confusing. Try opening one for your rainy day fun, an IRA for your retirement, and another for additional savings.
11. Use A Jar System
Once you know how much you spend in each category you can start a jar system. Basically this means allocating your money as you would and then withdrawing all your money for your variable expenses. Having cash will make it so that you cannot overspend.
To set up this system head to the dollar store and buy as many jars as you have categories. You will then withdraw the rest of the money from your account and place it in the jars. For example if you give yourself $45 for nights out put that money in the “entertainment” jar.
This is the money you have to play with for that activity. This way you will physically see how much you have left in each section. Once the money runs out of the jar you have no more money to do that activity. You will have to take from another jar. This will train you to spend within your means.
Starting a budget may seem like something you don’t need or shouldn’t need to do. This couldn’t be further from the truth. Most successful people as well as nearly every successful busing uses a budget to track their spending.
It may seem hard at first but with time comes understanding and habits that will have you reaching all your financial goals in no time.
Good luck! Be sure to let us know how the budgeting goes in the comment section below.