Today we are talking about budgeting. Know we are not talking about just writing down numbers we hope to achieve and reaching for the stars but rather how to create a “real” budget. In the end we want it to be achievable, reasonable, and an accurate picture of our income and expenses on a monthly basis.
You may be asking “What is a budget?”. In simple terms it is simply telling you your money where to go. A budget is a simple process…yes really. The main objective is to show the amount of income we expect, where we plan to spend our money, and how much we are left with at the end of the month. And yes I support a zero ending balance on your budget. This is saying all my money is accounted for. But on the other hand if you end up with more expenses in a month than income we have some work to do…because the focus is to keep out of debt and not owe debt from buying at the end of the month.
If you think you are not good at budgeting that is okay! It takes some time and by the third or fourth month you’ll be like a pro. Plus from yesterday’s post in 30 days you will have a better picture of your expenses and your budget will be adjusted.
Every great financial plan revolves around a comprehensive budget. This is for everyone whether you are trying to pay off debt, planning for a vacation, or trying to build up an emergency fund a budget is a major step in achieving the financial goal.
So where do I start? That is a great question and in a couple simple steps you will have a budget created.
1. Determine total income for the month—this will be your take-home pay (after tax) for yourself, if married, your spouse. Make sure you use the physical take home pay the amount you are taking to the bank. If you use your salary amount we would have so many more things to account for including federal, state, local, health, dental, and retirement funds. Make it easier on yourself and go with the amount you are taking to the bank. Include any other source of income—social security, second job, freelance pay, and any other continuing source of income.
2. Determine expenses by category—Start with your fixed reoccurring bills—mortgage/rent, auto payment, electricity, water/sewer, gym membership, cable/internet, and maybe even the monthly massage. This is easy to determine by pulling out your bank statement and finding the payment. Next you want to determine payments not paid on a monthly basis—such as quarterly homeowners insurance that are due for the current month.
Know take a breath….you are doing good. At this point you should have money available to spend or other things. If not, then we really need to have a conversation because you will never get out of the grasp of debt if you can’t afford groceries and gas to get to work if you are already needing to use a credit card for any other payments. Know you will total your other expenses for the month, like savings, gas, food, and entertainment. Remember every dollar you spend should be accounted for.
3. Determine savings and financial goals—Let’s see where you are at! If you subtract your expenses from your income and are have funds left over congratulations. However, if you are showing you are spending more than you are making it is time to start cutting those expenses. Do you need to eat out for lunch every day? Take lunch to work-move a portion of funds from eating out to groceries and save the rest. Are you paying for a gym membership that you aren’t using? Do you need to go out for coffee each morning before work? A $2 cup a coffee a day is $730 a year, which is a nice chunk of change. Maybe you can cancel the membership and save that.
Now that you have a clear picture of your income and expenses we want to start looking at keeping you in the positive. To do this you want to put money aside for an emergency fund, money for a trip, and retirement (don’t give me “oh I am only in my 20’s” earning interest on saving know will build up to a great amount of savings. But that will be discussed at a later time.
We want you leftover money at the end of the month to be between 15 to 20 percent for savings. I know I am throwing a lot at you today but trust me it will be worth it! Don’t worry I am not going to make it crazy at this point (we will discuss at a later time) but if you only have a checking account open a savings account with the bank as well. Now you may not make interest at this point because of a small amount in the account and watch out for fees charged by the bank. Find a savings account that allows no minimum balance. This is where the money left over at the end of the month will go. A savings account will not be as tempting to tap into for extra money.
4. Track your spending—After doing this work don’t let it go to waste. Keep handy your budget and record all your income and expenses. I write down every paycheck and expense per day so I don’t lose track. Plus doing this on a day to day basis keeps you from making those impulse buys and is satisfying to see where you are saving extra money.
A budget template is available at Feed the Pig
Remember after a couple months you will become a pro at this!!