So why do you need a budget?
Look, I will keep it straight with you: you don’t need a budget to have a lot of money.
If you want to make the most of your money, spend more time doing things that you love, and ensure that you have money saved up for a rainy day, then you certainly need some kind of plan.
A budget is more than just a paper filled with a bunch of numbers…
It is a written or typed set of goals to live by each month, its a record of your monthly spending habits, and it is a reminder to prepare for the events in the future that you may or may not foresee happening.
A budget can help you figure out how to pay for the life that you have been dreaming of, so read on.
A budget is one of the best tools for planning and managing your financial life
Without a basic understanding of what our expenses and income sources are, we are sort of wandering around blind in a big and confusing financial world.
Before we ever gain freedom or financial independence, we must first learn to manage our current financial situation and learn how to create a proper balance.
A budget always begins by calculating our fixed expenses and incomes; then we take an educated guess at our variable expenses and incomes (and plan accordingly); then after we understand how much money we have coming in and going out, we can use our budget to make adjustments as needed until we have a balance.
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Step 1: Determining fixed expenses
Our fixed expenses are all of the costs that we incur throughout the month that are a set dollar amount- they do not change on a month to month basis. Fixed expenses are generally recurring payments or bills that we see each month, but just because something is fixed doesn’t mean it is a requirement…
For example: your 99 dollar per month cable bill might be fixed, but let’s be honest…you don’t need cable to live.
Keep this in mind as you write out a list of ALL of your fixed expenses.
Jot out a list of each fixed expense that you have each month and how much it costs you each month, then put a star next to any bill that is a requirement to pay (car payment, mortgage, health insurance, etc.)
Examples of fixed expenses are: rent, mortgage, car payments, insurance payments, loan payments, phone bills, or any other cost that stays consistent each month.
Step 2: Determining fixed income
Fixed income is the income amount that we can depend on receiving consistently each month.
Fixed income is a paycheck (especially if you are a salaried employee), an annuity payout, government assistance, or severance or workers benefits.
Our fixed income may change slightly- think hourly wage earners- but it should remain fairly consistent month to month.
Now make a list of all of your monthly income that you can consistently count on.
If you work off of commission or work an irregular schedule, then try looking at your last 6 months income total and divide by 6 months to find your average monthly income.
Step 3: Determining variable expenses
Variable expenses are any of our costs that change from month to month; these bills are usually dependent upon our usage: gas bills, fuel for our cars, groceries, going out to eat, electric bills, water bills, doing fun activities, and travel.
Variable expenses change month to month, while fixed expenses remain consistent- or very close, each month.
When you are first figuring out your variable expenses it is best to leave the estimate a little higher than what you anticipate they will be, so that you don’t run short on money at the end of your first month of budgeting.
Again, you can find monthly averages by checking your credit card statements or by looking at your bills over the last 6-12 months and then adding them up and dividing the total by the number of months.
Make a list of each of your variable monthly expenses and their approximate amount (either from a monthly average or from a good estimate)
Step 4: Determining variable income
Variable income, like variable expenses, change month to month.
Variable income sources could be from: teaching or consulting, freelancing, bonus commissions or sales earnings, or referral earnings.
Make a list of any bonus or variable income that you receive each month.
Step 5: Making our budget work for us (Creating an awesome budget)
After we have determined how much money we have coming in and how much money we have going out each month, then its time to plug in the data and make sure that there is a balance.
Some simple rules to make an AWESOME budget…
1. Pay off debt- We can’t spend more than we make for long periods of time unless we are planning to incur high amounts of debt… in general we should avoid new debt, and seek to pay off as much debt as possible each month. (Some exceptions might student loans that have low interest rates help build credit, or home improvement loans that help us prepare a home to sell on the market).
2. Try to save at least 10% of your monthly income- Every person and family should try to save at least enough cash to pay for 6 months of expenses in an emergency situation. Worst case scenario: you lose your job or are unable to work for 6 months, 6 months of cash on hand can be the difference between bankruptcy and a temporary setback. Once you build up your 6 month emergency fund, then you should start building your 401K (if you have it), a ROTH IRA, or some other form of secure savings.
3. Save in advance for big purchases- If you know that you might need a new car a year from now, then make sure and budget in savings for your car NOW. Each time you take out a loan for a new purchase you end up paying extra money in interest…by saving in advance for major purchases and paying cash for all- or a major portion- of your purchases you can save $$$$.
4. Create a savings category just for fun and travel- Just like saving up money for a new car helps save you money, budgeting a monthly expense category for travel or doing things for fun can help you prevent putting charges on credit cards. If you know you are planning a 3 week trip to Europe next year, then start saving at least a couple hundred dollars each month now. By saving up cash now you not only prevent paying interest, but you also avoid doing things that you truly can’t afford.
5. Lower or cut out expenses whenever possible- Sure that 99$ per month cable bill might not seem like much, but over a year you are paying $1200 (not to mention modem leasing fees and other fees)…$1200 is enough to buy a round trip ticket to Europe, go on a 10 day cruise, or buy get a personal trainer 3 times per week for 4 months to finally lose that extra weight around your midsection. Most people CAN afford to do awesome things (like travel the world, or try something new), its just that most of us spend so much money on silly things like shopping or Starbucks that we simply don’t have the money to do the things that we truly want to do.
If you ever have questions about investments, getting out of debt, or saving up for retirement, then you should seek to get in touch with a great financial planner, many times their services will more than pay for themselves over a period of just a few years.
With those things in mind, let’s go ahead and start making that budget!
We need two columns for our budget so column 1 is for income, and column 2 is for expenses.
See the example below:
Job- $1600 per month
Rental property- $300 per month
$1900 per month/total
Sales commission- $500 per month
Extra work- $250 per month
750$ per month/total
Total monthly income- $2650
*Student loans- $200 per month
*Car payment- $250 per month
Internet, phone, cable- $125 per month
*Groceries- $250 per month
Utilities- $300 per month
Gym- $50 per month
Eating out fun/travel- $150 per month
Monthly savings $250
Total Monthly Expenses- $2650
In the example above we have a fairly close margin leaving us with an equal expense to income ratio; however, the addition of a monthly savings category along with a budgeted amount for eating out and doing fun activities leaves us with additional room for error or changes.
Many people make the mistake of not budgeting a set amount for fun activities like shopping or eating out with friends and seeing movies: without the addition of these activities in your budget it is not uncommon to drastically overspend and be left with high amounts of debt over time.
The main problems in budgeting are: not adding variable expenses (like fun activities and travel), not ensuring your budget is balanced, not being realistic, and underestimating the amount that we spend on certain categories.
In order for a budget to work, we have to monitor what we spend and make and ensure that it all fits into our budget -that may mean skipping things we can’t afford.
Rent needs to get paid before we pay the internet bill, and the electric bill needs to get paid before we go to see a movie; having a budget helps us maintain our priorities and ensure we make the most of our money.
By following the tips in this article not only can you create a balanced budget, but you will also be able to pay off debt and save up for emergencies, retirement, and future plans.
And if you are ready to start finding other ways to improve today…