Ah, the budget. It’s one of the most important things you need to do to maximize your personal financial situation. Ever wonder how you always seem to end up with $20 in your account the day before pay day, and you have no idea where it all went exactly? Or have a momentary freak out about how you’re going to be able to handle all of your current financial responsibilities and achieve your future financial goals and save something for retirement based on your post-tax income? That’s why you need a budget.
By making a budget (and more importantly sticking to it) you’ll be able to see exactly where your hard-earned money is going: large expenses, small expenses, necessities, luxuries, etc. You’ll be able to identify the areas that you can cut spending to save money for your short and long term saving goals and get a plan together for paying down your debt. In short, a budget lets you show your paycheck who’s the boss and puts you in control of your money. So where do you start?
Step 1: Calculate your monthly income
If your paycheck is always the same this is as easy as looking at your last direct deposit.
If your paycheck varies based on overtime or bonuses it’s a bit more complicated. Depending on what makes the most sense for your situation, you have a few options. One option is to base your monthly income on your base pay (and any extra from bonus pay or OT can be put into your savings account). A second method to consider – especially if you are commissions based in your pay or if your checks can vary widely from pay to pay – is to add up your net earnings from the last year and divide by 12.
Step 2: Make a list of your monthly bills and necessary payments
You can organize these into categories if you’d like – but the important thing is to make a list of every monthly expense/bill you owe. Don’t include expenses like gasoline or groceries yet. Just make a list of the expenses you have to pay each month. For example:
- Rent/Mortgage
- Utilities: Gas, Electric, Water, Trash, etc.
- Credit Card Payments
- Loan Payments: Auto, Personal, etc.
- Insurance payments
- Child Care expenses
Tip: If you haven’t contacted your electricity and gas companies to see about getting on an average cost payment plan that averages the cost of your utilities for the past year and gives you one standard monthly payment instead of a payment that varies depending on your usage – do it now. It makes it much easier to budget when you know exactly what your monthly cost will be.
Step 3: Create a list of quarterly, semi-annual or annual expenses
If you have expenses that you pay quarterly, semi-annually or yearly, figure out whatever the monthly average expense is for each item. Then add each average monthly expense together so you know how much you need to put aside each month to cover the expenses when they are due.
Step 4: Make a list of living and discretionary expenses.
You can get as detailed as you would like – in fact, the more detailed you get, the more accurate assessment you’ll have of your finances and the easier it will be to stick to your budget. Start by including the amount you are currently spending on each item monthly – if you aren’t sure how much you spend monthly on something like groceries – look back through your online banking statements to figure it out. Include things like:
- Groceries
- Gas
- Dining out
- Monthly medical RX’s
- Eating out at lunch
- Beauty and health products
Step 5: Add it up
Add up how much you’re spending each month vs how much you’re making each month. Now make adjustments as necessary. Take a good look at the places you could cut expenses and save money. Discretionary expenses are the easiest of find ways to cut expenses (eat out less, pack your lunch, buy generic products).
Step 6: Set your saving priorities
Once your income is greater than your expenses, you can decide what goals you want to save for. Yay!
Step 7: Track your monthly spending
This is the hard part kids. Now that you’ve determined your budget – you have to stick to it. And to do that, you have to track your monthly spending to see if your actual spending is in line with your predicted budgetary spending. There are several ways to keep track of your budget on a monthly basis – but here are a few that you might want to consider:
- Use a spreadsheet like the downloadable excel sheet on our Budgeting Tools page. Using your online banking records, you can create a running total of where you’re at with your expenses each month and categorize each expense correctly.
- Use an online Personal Finance Management (PFM) Tool such as mint.com. PFM’s basically do everything the spreadsheet method does, but they do it for you. Once you register online, you can set up your account and enter in your debit card and credit card information. Your expenses will automatically be tracked and categorized for you.
- The envelope method. To do the envelope method, you leave enough money in your checking account to cover all of your bills and you pull the money you budget for your discretionary expenses out as cash and then separate it into envelopes. For instance, you might pull out the $500 your budget has set for discretionary expenses in cash and then separate into 5 different envelopes: $200 for groceries, $100 for gas, $50 for lunches, $50 for make-up and personal care items, $50 for date night, and $100 for miscellaneous expenses. You use the money in each envelope to pay for the corresponding expenses – that way you can make sure you don’t go over budget and you always know exactly how much money you have left for each item.
These are just three ideas for how you can track your budget. If none of them work with your situation find your own method that does work. The important thing is to make sure you find a way to track your monthly expenses and stick with your budget – because creating a budget is only the tip of the iceberg. Any budget is only as effective as how well it is followed.