We all know it’s important, but almost none of us do it: budgeting.
Creating a budget and sticking to it is one of the most difficult and yet more fundamental aspects of our financial lives. It’s how we manage our spending, pay off debt, accrue savings, and make wise investments. We’ve all tried making a budget at some point, but most people eventually fall off and give up on tracking their income and expenditures in favor of a more laissez faire attitude.
Here’s a 10 step guide to creating a budget for yourself, and then (here’s the hard part) actually sticking to it.
Step 1 Decide why you’re saving money
This step is usually overlooked, but it should be your first one. We all know that saving money is important, but why?
You’re not saving money so it can sit in a pile gathering dust forever. Eventually, your savings is meant to be spent. If you don’t have a clear idea of why you’re saving money or specific goals for your savings, you’re not going to have a strong motivation for sticking to your budget.
If, on the other hand, you have been eyeing a fabulous vacation for your family for years, or a car you’ve always wanting, that’s a clear, concrete goal to aim for while budgeting. Keep your eye on that prize, and you’ll stick to your budget.
Step 2 Calculate your average monthly earnings (after taxes!)
This one may seem obvious, but many people don’t know how much money they make each month. It’s especially hard to track if you have multiple streams of income or your income varies from month to month. You’ll want to add up all your monthly earnings, from regular employment as well as side jobs, investments, and other forms of income, and come up with an average per month figure.
Make sure to calculate this figure after taxes. If you don’t already know your after tax earnings, you can use a take home pay calculator to come up with an estimate.
Having this number right from the start and keeping it in mind will be the foundation for the rest of your budget.
Step 3 Decide on a ratio for needs, wants, and savings (hint: it doesn’t have to be 50/30/20)
If you read a lot about budgeting and personal finance, you’ve probably read some advice before about the 50/30/20 rule. Just to refresh your memory, prevailing wisdom is that you should spend 50% of your income on needs (such as housing and food), 30% of your income on wants (such as shopping and entertainment), and 20% of your income on savings (this includes investments).
This is a great general guideline, but it’s not a hard and fast rule. When people don’t stick to a budget, it’s usually because it was unrealistic to begin with. That’s why universal rules don’t always work. Pick a ratio that’s right for you, but afterward, make sure you stick to it.
Step 4 Look back at your recent expenses with an honest eye
This part isn’t so fun, but it’s critical. Most people vastly underestimate how much money they spend, particularly on unnecessary items. One of the biggest reasons people don’t stick to a budget is that they aren’t honest with themselves about their expenses.
In order to be honest with yourself about how much money you’re spending (ahem, that $90 per month on Starbucks), you’re going to need to comb through your expenses for the past few months and take a good hard look at them.
Step 5 Set up a method for tracking your expenses
You can use excel spreadsheets, but since this is the 21st century, things have gotten easier.
Websites and applications such as Mint will automate this task for you a little, combing through your bank accounts to track and categorize your spending. It’s important to categorize your spending into things like rent, gasoline, food, beverages, shopping, etc so that you know where your financial weaknesses are. Perhaps you spend too much money going out to eat each month – if that’s what your assessment indicates, you know where you can improve.
Step 6 Calculate your fixed expenses
These are expenses that are not going to change within the next year. Typically, they are things like a mortgage payment, a car payment, necessary bills such as utilities and water, debt payments, insurance payments, and perhaps telephone and internet.
Because these are expenses you can’t really change, they’re important to keep in mind, but can’t help usually help you with savings.
Step 7 Calculate your flexible expenses
What you have left after subtracting your fixed expenses, otherwise known as your flexible expenses, is where you can really play with your budget.
Flexible expenses typically include spending on food, entertainment, travel, eating out, toiletries, transportation, and more. If you’re looking to adjust your budget and increase savings, this is where you’ll need to do it.
Look at your spending in the past few months and figure out where you can spend less. For many people, food is one of the most flexible areas of spending. Pick a goal for decreasing your spending in a few categories. For example, perhaps you want to save $100 on food and $150 on entertainment next month.
Step 8 Start things off with a no spending challenge
Once you’ve done all your calculating and budget planning, now it’s time to actually budget. The best way to jump start your budget is by participating in a no spending or budgeting challenge. This will kick your savings into hyper gear and really give you a feel for the budgeting mentality.
There are many challenges out there – some people even go so far as to try and live off of $1 per day for a month. You don’t have to go that extreme, although if you’re up for the challenge, go for it!
I recommend no spend weekends, or a no spend month instead.
A no spend month is a little harder, but worth the effort. It means you only spend money on necessities, for the entire month. This means no shopping, no movies, no going out to eat, and no iced lattes. Just bills, groceries (preferably only staples and necessities), rent, etc.
Step 9 Pay for everything in cash
A really great way to make sure you stick to your budget is to pay for everything in cash. Don’t even bring your debit card with you, and you won’t be tempted to use it on unnecessary things.
Make envelopes for all your monthly expenses: groceries, shopping, transportation, etc. Calculate the amount you want to spend in each category for the month, withdraw that much money in cash, and place it in the envelope. Once your envelopes are empty you’re out of money for the month.
If you have $200 in your groceries envelope, for example, you can plan to go grocery shopping once a week and bring $50 with you each time. This is one of the most effective ways to meet your budgeting goals.
Step 10 Review your spending after the first month and adjust your budget
After your first month, review your spending to see how well you did. If you stuck to your budget perfectly, decide whether or not you can afford to save even more. If you didn’t stick to your budget, figure out why, and adjust.
Whatever you do, don’t give up! Budgeting can be tedious, but keeping that savings goal in mind makes it all worthwhile.
Where are you at in your budgeting journey? Share with us below!