Let’s be real: Saving isn’t sexy, but its necessary.
The simplest way to figure out how much of your money can be saved is by determining where the hell all of your money is going, in the first place. The simplest way to do that is by creating a budget.
Typically when a person hears the word budget, uttered in their presence, their eyes tend to roll uncontrollably to the back of their heads . But budgets are a necessary evil.
You’re probably wondering “What exactly is a budget?”
Or, not. You probably already know what a budget is, and are currently rolling your eyes, as I type. But you’re gonna get these deets, anyway and you’re GONNA LIKE IT!
A personal budget is an itemized summary of expected income and expenses for a defined period of time, typically month to month. A budget will show you how much money you expect to bring in against all of your expenditures, from the required expenses like house payments and rent to discretionary spending like entertainment.
What a Budget Does
As a personal financial planning tool, a written, monthly budget allows us to plan for how we will spend and/or save our money each month and also keep track of our spending patterns. Now, I know that making a budget doesn’t sound like the most exciting activity (I could personally think about at least a thousand other things that would be more fun to do), it is vital to keeping our financial house in order as budgets rely on balance. If I spend less in one area, I can spend more in another or choose to save that money for a larger future purchase (like that loft downtown), building a “rainy day” fund, or even for (early) retirement.
Before we can begin to make our budget, it is important to realize that in order to be successful we have to provide as much detailed and accurate information as possible. Ultimately, the end result of our new budget will show us where our money is coming from, how much is there, and where it is all going each month. Now that’s sexy.
How to Make a Budget
Let’s keep it simple:
- Gather every financial statement you can. This includes bank statements, investment accounts, recent utility bills, and any information regarding a source of income or expense. One of the keys in the budget-making process is to create a monthly average, so the more information we can dig up the better.
- Record all of your sources of income. If you are self-employed or have any outside sources of income, be sure to record these as well. If your income is in the form of a regular paycheck where taxes are automatically deducted, then using the net income (or take home pay) amount is fine. Record this total income as a monthly amount.
- Create a list of monthly expenses. Write down a list of all the expected expenses we plan on incurring over the course of a month. This includes a mortgage or rent payments, car payments, auto insurance, groceries, utilities, entertainment, etc. Basically, everything we spend money on.
- Break expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the same each month and are required parts of our way of living. They included expenses such as your mortgage or rent, car payments, cable and/or internet service, trash pickup, credit card payments, etc. These expenses, for the most part, are essential yet not likely to change in the budget. Variable expenses are the type that will change from month to month and include items such as groceries, gasoline, entertainment, eating out, and gifts, to name a few. This category will be important when making any changes or adjustments.
- Add up your the total of your monthly income and monthly expenses. If our end result shows more income than expenses, you are off to a good start. If your expenses are way more than your incoming- therein lies the problem. but don’t be discouraged. This gives you the opportunity to prioritize any excess areas of your budget such as retirement savings or paying more on credit card balances to eliminate that debt faster.
- Make adjustments to expenses. If you have accurately identified and listed all of your expenses, the ultimate goal would be to have your income and expense columns be equal, or zero out. This means all of your income is accounted for and budgeted for a specific expense or savings goal. If you are in a situation where expenses are higher than income, you should look at your variable expenses to find areas to cut. Since these expenses are typically non-essential, it should be easy to shave a few dollars in a few areas to bring you closer to your goals
- Don’t love it and then leave it! This isn’t a wham, bam, thank ya ma’am scenario. Review your budget monthly. It is important to review our budget on a regular basis to make sure we are staying on track. After the first month we should take a minute to sit down and compare the actual expenses versus what we had created in the budget. This will show us where you did well and where we may need to improve.
Alright. That’s all folks! Do you have a budget? Are you able to stick with it? What are your struggles and successes with following a budget. Let me know in the comments!