Finances and budget planning aren’t the preferred topic of conversation for many people, but it is one of the most crucial. A 2013 Gallup Poll showed that only 32% of Americans prepare a detailed budget plan. With how much money Americans spend on dining, entertainment, and shopping, it’s remarkable how few of us keep a budget.
Outside of simply staying on top of expenses, there are a number of other reasons to create a budget. Budgets build wealth, help get out of debt and realize unnecessary expenses, and they’re a guide to saving for the future.
It’s common for people to spend money on things that they don’t need. Whether that be a large purchase like a new car, or a small purchases that we make on a daily basis, like coffee and lunch at a restaurant. Many of us never realize how much these expenses add up, because we never keep record of them.
These actions forces many people to overdraw on accounts, max out credit cards, accumulate large sums of debt, and never implement a financial strategy. This is no way to live. Once you’ve decided to create a budget, the process is rather easy. Here’s how.
Two Budget Options
You have two primary options for creating a budget: either a manual or an electronic budget. A manual budget means that all budgeting information will be filled in yourself, using either physical documents, online spreadsheets, or phone applications - like EveryDollar or Mint.
The second option, an professionally managed budget budget, implies that a third party will be creating a budget for you. In this scenario the third party is the primary source for calculating your budget. This is a useful option for those who want to save time and don’t trust themselves budgeting, but third party sources cost money, money that you may not have in your budget, or that you don’t want to spend. But don’t worry just yet, like we said, budgeting is easy. You can avoid having to use a third party.
Starting Your Budget
Once you’ve decided to start a budget, a few simple steps will place you on the right track to financial literacy and useful planning.
Start by knowing how much money you have in all of your accounts: checkings, savings, investment, and any other financial account. Here you will establish how much money you actually have.
You’ll need to determine how much money you make a month. For people who work salaried jobs, this will be rather easy, but those whose jobs provide infrequent incomes will have to calculate differently.
If you don’t have a salaried job, calculate the average of the last 6 to 12 months of income and use that figure. To be even safer, choose the lowest monthly amount you earned in the last year as the average. It’s always best to underestimate and have spare money than it is to overestimate and be short on funds.
Now it’s time to take a look at monthly expenses. On this step you’ll need to list all of your fixed expenses, which are non-discretionary expenses (the expenses that you have to pay every month.)
Items that are included in these expenses are debts, rent and mortgage, gas, water bills, groceries, car payments, and student loans. Every single bill that may be owed during a month should be included here.
This step is one of the most important on this list—setting financial goals. Here you will determine what spending is important to you, so that you can prioritize and avoiding going about with your current spending habits.
Start writing out your financial goals. Write these the same way you would write common goals. Do you want to save a certain amount of money? Are you aiming to get out of debt? Are you saving for a child’s college tuition or other major life expense?
Think about the results that you are aiming after and write them down. When you’re setting these goals you have to look at your ideal scenario and compare it to where you currently are. It might be unlikely to reach your long term goals in one year, so you’ll simply need to set shorter term goals.
The best way to start moving forward with these goals is to begin to think of them as monthly expenses and adding them to your list of expenses. Is your goal to save for a child’s college tuition? Add an expense line of the amount of money you would like to save each month.
(Though these aren’t truly expenses, this tactic will trick you into putting this money aside every month to save.)
Once all of your expenses are tallied, including your non-discretionary payments and the money you’ll be aiming to save a month, start tallying up your discretionary expenses, which are expenses that you don’t have to make every month. These are items such as entertainment, vacations, clothing and other purchases, eating out, et cetera. This section of your budget should be adjusted to reflect what you can afford.
Remember that these discretionary expenses come after all bill obligations, because financial health always comes before fun, entertainment, and non-life essentials.
This step is the hard one, because here you’ll see where you stand financially.
Here you’ll subtract all of the expenses that have been tallied from the income that you make.
If the resulting number is positive, it means you make more money than you spend. This scenario provides some leeway to place more money into savings account, debt payment, or an extra vacation if you so incline.
If you end up with an even number, it means you budgeted an exact amount, and you have no more or less money to use or lose. In this event, you should remove some money from your discretionary category so that you have additional funds in the event that something unexpected occurs.
The last option is that you received a negative number, meaning that you spend more money than you actually make a month. This isn’t good. The solution is to decrease the discretionary and unnecessary spending, or to attempt to make more income with a new job, side hustle, or another source of funds.
Remember: Always make sure that your financial goals are met before you begin to spend on anything that isn’t necessary. The last thing you want to do is to be accumulating more debt. For example, you should never be going on a vacation if you don’t have the funds to do so.
The last and final step is to implement your new strategy, monitor it frequently, and adjust your game plan when necessary. You may encounter new expenses that you didn’t foresee, get a raise or promotion at work, or any other scenario that changes your income.
Staying on top of your finances and making sure that you are never negative or equal will allow you the leeway to make decisions and spend money if something is necessary or you really need a short vacation.
A great approach is to schedule a time every week that is set aside just to evaluate your budget. Here you can make sure that every goal is met, nothing unexpected has occurred, and even plan for future ways to use money.
Additional Budget Help
If any additional help is needed, you can consult a financial coach or planner, take a budgeting class, or even indulge in podcasts, books, or other resources to further your knowledge on how to work a budget.
Remember, Anyone Can Budget
Some of this information may seem difficult and you may be working with many variables, numbers, and even family members who aren’t trying to stick to a budget. Always remember that you aren’t the exceptional case that simply can’t budget, everyone can do it!
Budgeting only requires practice, discipline, and patience. You may not succeed the very first time you start budgeting, but you’ll begin moving in the right direction and building good habits.
Don’t give up on your budget if you make some mistakes, or if new expenses arise and wreck havoc on your plans. Do the best that you can, and before you know it, you’ll be teaching your friends and family how to budget too.