Do you know how much money you have right now? Are you familiar with your spending habits? If you were faced with an unexpected bill for $500, would you be able to pay it? If not, it’s time to dive into the world of budgeting. Here are some tips based on the triumphs and pitfalls that I experienced when creating my first budget.
Make a list of financial goals
Before you see how much money you have to work with, make a list of the ways you’d like to use your money. Would you like to pay off debt? Buy a car? Take a vacation? Give to charity? Make a list of the things that are important to you, and if possible, rank them from most important (I want this as soon as possible!) to least important (this can probably wait a couple of years). Knowing what you want in advance can help you direct your budget to meet your goals. Be sure to include an emergency fund as a top priority! Nothing can derail a budget faster than an unexpected expense. Aim to save somewhere between $500 and $1,000 over the next 6-9 months in case of emergencies.
Figure out your income and expenses
Figuring out your income shouldn’t be too difficult—go to your most recent bank statement and add up all the money that came into your account that month. If you have a variable income from month to month (if you work on commission or get most of your paycheck from tips, for example), check out this blog to get some tips tailored more to your needs. Your expenses will be trickier. Here are a couple of steps to give you an idea what your monthly expenses are:
- Check out last month’s bank statement and categorize every transaction (housing, bills, school, debt, groceries, fun money, etc.).
- Track and categorize your spending for one month without living under a budget. Compare this list to your bank statement categorizations and fill in any gaps.
- Make a list of bills/expenses that aren’t monthly (car licensing/taxes, doctor’s appointments, oil changes, Christmas/birthday gifts, etc.) and create a loose estimate for how much you spend in those categories each year. Divide that amount by 12 and that’s the amount that you should save for those things each month.
- Make a goal amount for savings and decide how much money you’d like to save each month.
Survey the damage
Now that you have a better idea of the money that enters and leaves your bank account, it’s time to do the scary part: compare your income to your expenses. There’s a chance that your current monthly expenses may be higher than your income. Don’t freak out! This is why you’re creating a budget—to handle your money better. Good money management is not an innate skill. You need to practice, and you’re taking the first step to becoming a pro at budgeting. Good for you!
Make adjustments and create a ‘first draft’ budget
After you’ve reviewed your finances (and maybe taken a few days to recover from the shock), it’s time to start planning out your budget. If you’re spending more than you’re making, it’s time to make some cuts. Some of your expenses will be fixed amounts, such as most of your bills, but some of your spending can be adjusted down. If you’re looking at your income and expenses and have no idea where to start, look online for some sample budget templates. These templates can also provide an idea of the ‘normal’ percentages of your income to spend on certain categories so you have a better idea of where to reduce spending. Plan out every cent that you receive. It may be tempting to cut out all ‘fun’ money when you first start budgeting, but make sure you set aside a little for restaurants or activities with friends. If you’re never allowed to have any fun, you won’t stick to your budget for long.
On the first of the upcoming month, start living by your new budget. Track and categorize every transaction that you make (free apps like Mint or EveryDollar can help you track your spending against your budgeted amounts), and when you’ve used up your budgeted amount in a category, you’re done! No more spending in that category until the next month. If possible, I like to leave a bit of money unbudgeted each month (think $30-$50) so that if you accidentally go over in an important category like groceries, you have a little bit of cushion. At the end of the month, put any leftover cushion money and unspent money in your non-savings categories directly into savings or toward debt. If manually tracking your transactions is tough for you, some budget apps can connect to your bank account and auto-categorize your spending.
Be flexible, and stick with it
Sticking to a budget is not easy, especially at first. It’s important to not give up and to be flexible. If you’re struggling to stick to your budget, see if you can recruit a ‘budget buddy’ to help you keep on track. If you feel like you’ve ‘failed’ at your budget one month, try to figure out why you went over in certain categories and adjust your budget accordingly. A good budget helps take care of your wants and your needs, so it’s important to plan for both. If your income is too low to support your needs, see what you can do to increase your income, whether it’s taking on another part time job, giving blood/plasma, or having a garage sale. You should also see if you can reduce some of your expenses. Check and see if you can get cheaper rates for bills like cell phone, car insurance, internet, and monthly minimums on debt.
Budgeting can be difficult at first, but once you get used to it, it will make a huge difference in your life. If you’re already on a budget, what are your best budgeting tips? Leave them in the comments below!
Check out the other blogs in this series: