Budget … budget … budget…
I bet you have heard this a lot! Maybe you have one or maybe not? You may not know what does it totally means but that’s okay. Because I used to be like you, clueless about budgeting.
What I know is just simple. A budget is all about income minus expenses and that’s it. Yes, it was as simple as that. But when you try to dig deeper you will be able to find out more.
Creating a budget isn’t complicated at all. However, most of us don’t want to sit and take a moment to review our finances.We tend to avoid reality that more often that not, we wonder where our money went.That’s because we simply don’t assign a role for every single penny we make. All we know is every penny earned is meant to be spent to whatever we like to spend it to.
Now, you know why you end up having no money before the next paycheck comes. I simply get that because I have been there too. That’s the reason why I started creating a budget. Having one is an eye-opener. It allowed me to see where does my hard-earned money goes every single month. I no longer wonder where my pennies went.
Are you ready to dive in? Grab a pen and paper/notebook and let’s get started. Okay, you might say that but hey, there’s lot of apps in there that can be used. Well, yes! But I love to use pen and paper. It motivates me more to do my budget on a real paper instead of an app.
The first step is to determine how much is your net income ( after taxes ) every month and when are you being paid. Are you being paid monthly, bi-weekly, every 15th or 30th, or weekly? Figure that out because it is very important to know when your money is coming. What if you have irregular income? Meaning the amount of pay you receive is not the same every month. I would say use the lowest amount of pay in your budget outline. It will make more sense when you do this.
Now, lets’s start writing. On the upper part of the paper, write your income. If you’re a couple write both of your incomes and add the total. Below that, create a list of your expenses. When we say expenses, this is where we spend every single dollar of our income. Your list will be compose of three columns – date, categories and the amount. Fill each categories with the corresponding dates and amounts. But, I don’t know how much exactly I am spending on food, gas or coffee. Well, to make work easier for you rather than remembering everything in your head, log in to your bank account or your credit card account. Print your statements of accounts for the past 2-3 months and start highlighting each category. Why highlight each category? This will make things easier for you to determine how much are you spending on food, gas, or shopping. I suggested 3 months because it will give you an average amount of your spending at least instead of just merely guessing.
Okay, after creating a list of your expenses start categorizing them if it’s variable or fixed expenses. Variable expenses are the ones that changes from time to time like food/groceries, utilities(natural gas, electrity, and etc) . Fixed expenses from the word itself you know what it means. This will include cellphone bills, car payments,and etc.
* Note: If you’re really new about this, I would advise you to manually track your expenses by using pen and paper . I would also advise you to keep your receipt for every transaction you make for easier tracking. Your outline will include date, amount and the description of expenses. Do this for at least 4 weeks to give you a better idea on how much are you spending on your variable expenses.
Now, let’s do the math. Subtract your expenses from your income. Okay, there will be 3 results. It could be zero, a positive number and a negative number. When you get zero that means it’s break even. It simply means that you’re making enough but no wiggle room for emergencies. Therefore, it needs improvement. If it’s positive, then it’s good because making enough money to cover your expenses. Now, you may or may not need to do some improvements depending on the amount of leftover you have every month. Okay, the negative result indicates 2 things: you either have an income problem or you have a spending problem. An income problem is you’re not making enough money to cover you expenses. If this is your case, then it’s time to look for a part-time job, a side hustle or a better paying job. The spending problem is you spend too much on everything or living above your means. Therefore you have to make some changes.
Are you still with me? After making an assessment between your expenses/bills and income, let’s move on. It’s time to take a closer look and review your expenses/bills. Time to make some adjustments with your expenses/bill that you’re spending money on. Your basic necessities ( food, shelter, etc ) should be on your top priority. Next, decide about the rest of the list. I know that there are certain things in life that we can’t either live with or without. If that’s the case don’t worry because I’ve got you covered. Below are the 3 things that you can do to lessen your expenses:
- Cut it off – this is for the things that you can live without.
- Substitution- instead of cable, use antenna or replace it with Netflix or Hulu, make your own coffee instead of buying it every morning
- Negotiate your bills – I did this with our internet bill. When our loyalty discount has ended I called them that am willing to stay with them our bill will be the same as it was.
When I became serious about getting my finances in order because I wanted to pay off debt and save, I started to make research on how can I lower our bills. Like cutting off our cable and just retaining the internet. Do you know that cellphone plans don’t have to be too expensive? Yes, for the past few years I have been paying minimum $50 every month. Now, I am only paying $16.21 every month. I researched which cellphone company can offer me the best price that will meet my basic needs. I bet there’s a lot of options when it comes to making adjustments with your expenses. I also found out that we spend too much on food. We found ways on how to save by meal planning and buying only what we really need.
If you have leftovers what you should do?
Think and decide what do you want to do with it. When I was not yet serious about my finances, I would go to the mall and buy myself something nice because of the mentality “ I deserve it.” And this left me with nothing in my bank. But it’s different now. I wanted to pay my debt faster and save for the future. That’s why I decided to create funds so I know where to put the rest of my pennies.
One of the most important fund that you should create is emergency fund. So you’re next question might be what is this? An emergency fund is something that will get through during those unexpected circumstances like losing a job, getting sick, or your furnace broke and etc. The amount of an emergency fund is up to you. It’s something that you’ll be comfortable with sleeping at night. Okay, why do I need an emergency fund? This will prevent you from getting more into debt especially if your goal is to become debt free.
Another fund that you should have is called the sinking funds. These are more of the expected expenses in a year like birthdays, taxes, back-to-school, car maintenance, vehicle registration and Christmas. You need to determine the amount of each category and divide it by 12. But if you’re just starting, categorize them according to your priorities. When I started, I didn’t have any of those. What I did is that, I saved the money a month before the event. Also, I keep the amount minimal so it would fit in my budget. But having these funds gives you time to prepare for such expenses and it is way easier for you if you have enough wiggle room in your budget.
When you’re done creating those funds, it’s time to set bigger financial goals. It could be paying off debt, saving for a house or for retirement. Whatever those goals you have written them down. Remember that setting a budget is not all about setting money for your basic needs and bills. It should also include paying debts and saving for the future.
One important thing that you have to create is a budget calendar. In this calendar, you will mark when are you being paid and also when do you pay your bills. Knowing your bill payment schedule gives you an idea if you have enough money sitting in your bank before doing any unplanned spending. This avoids the usage of using overdrafts.
If you’re just starting out, don’t be overwhelmed. It’s okay to start slow. Give yourself enough time to get used to the process. I know it needs work but trust me you will master up in no time. Also, be easy on yourself when you go over your budget sometimes. Believe me, there will be more of this to come but this will teach us valuable lessons to make our budgeting workable.
Again, budgeting doesn’t have to be complicated. It should be realistic and not restrictive. Creating unrealistic and restrictive budget leads to failure. Yes, 100%. I say this because I’ve been there. That’s why I want you to start tracking your expenses before assigning a certain amount to each category in your budget.
Your budget must be personal. This is why most budget fails and people tend to just give up. When I say personal, you need to base it on your actual family needs. Just because I put an X amount to my food category doesn’t mean you have to put the same amount too. Remember that our food consumption is totally different from yours. Also, be aware about your categories. Start with your basic needs then gradually add as your budgeting gets better. What I have in my budget category may not apply to you so remember that.
The success of budgeting is consistency. It needs continuous work to see that it’s really working. If you want to succeed on this you need to keep going even when there are slip ups. Also let create a room for flexibility in your budget. There will always be changes that will occur so be ready for it.
Finally, focus on progress not perfection! Give yourself some grace when you made mistakes. As time passes by, we learn our lessons and we get better as long as we keep going.