Creating a budget that works for you, Where to start, and What it takes to make it last.
With the start of a new month, it feels like the perfect time for a fresh start with everything. It’s like a breath of fresh air. A clean slate. Maybe last month your finances weren’t quite where you wanted or needed them to be. That’s fine, no problem. That just means it’s time to create a household budget that you can stick to.
Most people think budgets suck! “Eww, what’s a budget?” “Budget? HA. We’re too rich for a budget.” WRONG. No matter how much money you have coming in, if you can’t account for every dollar you’re spending, you probably either aren’t spending it wisely, or you my friend are more than likely spending money that you don’t really have. Instead of viewing budgeting as a negative thing, view it as more as a critical tool to help you reach your financial goals.
Your finances are extremely important, but budgeting can, and more than likely will be a trial and error experience. What works for you may not work for someone else. Everyone’s pennies are different, and everyone’s expenses vary. The only things that will be the same for everyone is that everyone will have expenses. Unless of course, you’re just living off of the land, creating your own textiles, sewing your own clothes, and walking or riding a bike wherever you need to travel. And, everyone will need some sort of income to pay those expenses.
Now is the perfect time, now more than ever, to find what works for you and really start to concur your finances.
What a Budget Does
Budgets give you the tools you need to plan for how you will be spending over a period of time (usually month to month), how you can or will be saving over a period of time, and it can also be used to keep track of your spending patterns so you can start to see exactly where your money goes.
Where to Start
For most people, finances are scary, but it’s vital to keep your financial house in order. At some point, you need to think of your family finances like a business. You need to be detailed, accurate, and as thorough as possible. If you have your last 2 or 3 months of income statements, bank statements, or copies of your bills, start there. Gather this information to review so you can get a better idea of your average income, and expense numbers.
1. Record your average monthly income
Record the average monthly take home pay for your household. This is where being detailed and thorough comes in handy. If you have your last few paystubs or bank statements, this should help to give you an average number of what you’re bringing home per week, biweekly, or monthly. Use this to determine what your total monthly income number is, because this is what you’ll be using for your budgeting since you’re recording expenses on a monthly basis.
2. Create a list of household expenses
Now that you have a clear idea of what money you have coming in, create a list of household expenses. Everything that you can think of. Don’t just include household bills, (mortgage payment, car payments, auto insurance, groceries, utilities, entertainment) and then forget to include expenses like your actual household items. Cleaning supplies, sponges, rags; if you change them out monthly, toilet paper, paper towels, all of these things are also considered household expenses, because these are things that you will inevitably need in your home every month.
3. Categorize your list of household expenses
Separate your expenses into two categories: fixed and variable. Your fixed expenses will be the things that stay relatively constant each month. Things that are usually a requirement to your everyday living like, rent or mortgage, car payment, cable/ internet, credit card payments if you have them. You won’t really find these expenses sporadically changing.
Variable expenses are your expenses that may change from month to month. Items like gas, groceries, entertainment, and even your grooming (hair, nails, haircuts) budget. These expenses may or may not be essential to your everyday living, but these are normally the things that are easiest to make changes when in need of cutting back.
4. Total your monthly income and expenses
After totaling both your income and expenses, you should have an end result that shows more income than expenses. This means that you’re bringing in an adequate amount of income to cover your monthly expenses. Pat yourself on the back, that’s great! This means that you can start using your excess money to use for a designated savings of your choice, and or extra splurges and entertainment. If your results show that your expenses are higher than your income, no worries. This just means that you’ll have to do some adjusting to your budget and expenses.
5. Make adjustments to your budget
If you have accurately listed all of your expenses, the end goal should be having your income and expenses either be equal, or have an increase in your income amount. If you happen to have increase in your expense number, you should look at your list of variable expenses first to either decrease costs, or cut them all together. You currently can’t afford it. Since these expenses are typically non-essential, it should be easy to find ways to bring you closer to your income number, whether that be decreasing your grocery budget, finding a cheaper hairstylist, or decreasing how often you’re getting your nails done. Another great thing to look out for when decreasing expenses would be things gym memberships and subscription services.
6. Review your budget (Trial and Error)
Now that you’ve created your budget, here is when the trial and error comes in. It’s important to go back and review your budget, weekly to make sure that you’re staying on track with expenses and saving, but you should also look over your budget again after your first official month using it. Sit down and compare what you planned for expenses, versus what you actually spent. This will help to show you where you did well, and where you might need to make improvements. If there is a large difference between what you expected and the reality, then you might need to increase your budgeted expenses accordingly. If there is a slight difference, that’s still okay. Trial and error. Just work harder throughout the next month to stay within budget. Soon you’ll be budgeting and spending like a pro!