A budget is an essential tool for any regular individual looking to turn their life around and get it organized financially. When we say a regular individual, we are talking about the Average Joe working a steady (or non-steady) 9-5, trying to make ends meet. This is basically the majority of the American population, living paycheck to paycheck and dreaming of financial freedom. If this sounds like you, then you must pay special attention to this post and learn how to budget. For this simple tool has the potential to make a great impact in your life.
Getting Started
To begin, you must assess your current circumstances. This is where you have to be willing to accept your situation no matter how bad it maybe. You cannot improve yourself without accepting your shortcomings. So to start off, first you must determine how much money you have. To do so you must tally up all your funds that you can draw from immediately. This includes your checking, savings, investments and other business accounts etc. If you have any recurring sources of income such as side hustles etc, those must be factored in as well.
What’s In Your Pocket?
Figure out your monthly income (after taxes). If you are a salaried employee, take your annual income and divide it by twelve to figure this out. If you get paid hourly, figure out your hourly pay and multiply it by the number of hours that you work each week, then multiply that by four to figure out your monthly income. Try to get as exact as possible. If you work odd jobs or have variance in your salary from one month to the next, use the average of the past six months or a year to come up with your monthly income. If there are one or two months in that range where you made an unusually high amount of income, leave those out as they will give you an unrealistic number to work with.
Set A Goal
The next thing you need to do is to determine how much money you would like to save. Set yourself some rough goals. You have to be reasonable and realistic here. There is nothing wrong with aiming high but you must realize that Rome wasn’t built overnight. It’s very easy to get discouraged if you set yourself a very difficult goal to achieve from the word go. Is your goal to build up an emergency fund? Is it to set aside money for an investment/retirement portfolio or do you want to start setting aside money for a kids college education? Once you have a goal in mind, it becomes easier to start setting money aside for it.
Do A Self-Inventory
What comes next is again a difficult bit which requires you once again to be honest with yourself. This is where you figure out where you are spending your hard earned money. If your goal is to budget and spend within your means, then its obvious that you must spend less than you make. Therefore it is absolutely essential to determine exactly where your money is going. This is also a fairly time consuming business as it will require you to go dig deep into your finances. Look into your past banking statements and receipts to see where and how you have been spending money in the past six months. To make this process easier, lets break it down a little.
Tally Up The Expenses
First, you should look at your debt payments. Make a list of all the avenues that you owe loans to such as your mortgage, credit cards, student loans, car loans and all such things. Next, make a list of all the bills and payments that you are making on a monthly basis. These would be all your utility bills such as gas, electricity, phone and internet etc. Don’t forget to take into account the payments that you normally make on a quarterly or semi-annual basis. This would be things like insurance payments for your car or taxes for your home etc. You will need to take the total annual amount for these and divide it up by 12 to determine your monthly cost.
Next, tally up your grocery expenses for the past six to twelve months and calculate your average monthly grocery bill. Do the same for the amount of money you spend on special occasions such as birthdays, anniversaries and holidays etc. Lastly, look through your bank statements for unexpected expenditures such as cash withdrawal or one-time essential purchases etc. Average these out over the course of the year as well and determine what this breaks down to on a monthly basis.
Reflection Time
Now that you have a list of all your expenses in one place, take the time to study this list. Often times, in the absence of a budget, it gets easy to get the blinders on and lose sight of where your money goes. Having your own expenses researched and outlined in front of you, might make you realize for the first time how well or otherwise, you’ve been spending your money. Highlight all the expenses that you now see you could have done without or areas for improvement. You will be using this to de-clutter your finances.
Income Vs Expenses
With the list of your monthly expenses and income ready, the next step is to compare the two in order to see how the two stack up. In an ideal world, your income amount should be substantially larger than your expenses. If you see that your expenses are significantly higher than your income, then it’s time to make some drastic changes. Start taking a serious look at all the needs vs wants in your life. Ask yourself if you can live without Netflix or dining out every night. Scrutinize all the recurring memberships that you have and zoom in on ones that you can get rid off. The goal should be to ensure that you are able to get your expenses under control such that your income exceeds your expenses. This should enable to put aside enough money to reach your goals that you had set out earlier, in a reasonable amount of time.
Now that we have the basics of budgeting under our belt, it’s time to get into some tips and tricks that can help make the journey a little bit easier.
- Realize that beyond food, shelter, clothing, health and transportation, majority of the avenues where money is spent, isn’t usually a necessity.
- For all the necessities, try and shop around for options. Look into couponing for groceries, renting with roommates for accommodation (if possible), cutting back on clothing expenses and looking into public transportation or carpooling if possible. Health is the one place where we do not recommend cheaping out. Though do shop around when it comes to gym memberships etc to find cost effective options for your needs.
- Create a spreadsheet based on the income and expenses that we discussed above to keep track of your money and visit it every time you get paid. Log the actual expenses next to predicted ones and see whether you are on or off track.
- Learn to pay yourself first. Once you have figured out how much money you are able to regularly put aside after essential expenses are paid for, setup an automatic withdrawal from your checking account into your savings every payday.
- Look for ways to supplement your income. After all, advocating for Side Hustles is what this blog is primarily about.
- Every time you have the urge to buy something outside of your necessities, sleep on it a couple of days before making an impulse purchase. After a few days have passed, you might find the urge to buy disappear altogether.
- If you are finding it really hard to stay on track, try using the old fashioned pen and paper method to write down and track your spending. This way, you will remember your income and expenditures better and knowing where you stand will deter you from making needless purchases.
- Some bank accounts allow you to round up your expenses to the nearest dollar and add the extra money to your savings account. If yours does too, enable that feature. That extra change will start trickling into your savings. It may seem small, but by the end of the year you will find that you have tucked away a substantial amount into your savings without even knowing it.
- Constantly review your budget and make incremental improvements to it. Try and see if you can find more avenues to save and cut down on expenses as often as possible.
- Remind yourself of the goal that you have set out for yourself as to why you are budgeting in the first place. This will help you stay on course if you ever wavered in your commitment to save.
In Conclusion
To conclude, budgeting is one of the most effective tool that every one ought to be utilizing in order to achieve their financial goals. It is something that we ought to learn in school but as we all know that isn’t the case, unfortunately. It is therefore vital that we take matters into our own hands and learn how to budget for our finances. If applied early enough, a budget helps us get financially disciplined and trains us to use our money wisely.