Budget Basics ~ How to Get Started
Before you can create your budget you’ll want to take a look at your income and your expenses. You’ll need a good understanding of everything coming in and going out. You also want to figure out what you want to accomplish with your budget. Do you want to get your spending under control, save more money, pay down your debt, or are you trying to accomplish something else. Once you have a good understanding of your “why” it will be easier to create and stick to a budget.
Let’s get started! You can sit down at your computer with your favorite spreadsheet or grab a pen and a piece of paper. Choose the method that is going to work best for you. It doesn’t matter how you track it, just that you’re tracking it. If you make budgeting too complicated you’re going to view it as a chore and not follow through.
1. Determine the amount of money that you have coming in each month. Be sure to count all sources of income so that you have an accurate picture of your finances.
2. Determine your expenses. Start with expenses like your rent/mortgage, car payment, credit card payments, utilities. Then look at expenses like food, gas and other incidentals. Most people underestimate these expenses so now would be a good time to take a peek at your bank statements and any receipts you have hanging around. If you don’t have an exact amount for the last month then go ahead and estimate it for now based on the information you have available.
For the next 30 days write down every penny that you spend. This will give you a more accurate accounting of expenses like food and other incidentals (i.e. that coffee that you pick up every morning on the way to work). Once you have done this you can make adjustments to what you have budgeted for these expenses.
3. Take a look at your expenses to see if they are necessary or can be reduced. For example, do you have a subscription for Hulu or Netflix that you haven’t used in the last 6 months? Maybe now is the time to cancel that unused subscription. Now is also a great time to call your cable company or cell phone provider to see if you are in the most cost effective package for your needs. If you don’t like what they have to offer, shop around to see what else is out there. No one is saying you need to cut the cord but if you want to keep a cable subscription make sure you’re getting the most for your money.
How long has it been since you’ve reviewed your car and home/renters insurance? Call your agent to see what their best deal is. Keep in mind that most of the time you will get a discount if you have both your car and home/renters insurance with the same company. Once you have their best offer shop around to see what else is out there, especially if it’s been a while since you’ve done that.
4. Create a budget. Now that you know what your income is and what your expenses are it’s time to create a budget. A zero dollar budget works well for most people. This type of budget accounts for every dollar that you bring in. Start by listing your income and then subtracting all of your expenses. Hopefully, you have something left over after you complete this process. Now you need to allocate that “left over” money. How should you allocate this? That is going to depend on your individual situation. Are you paying off debt? Do you have an emergency fund? At a minimum you should have at least 3 months expenses in this emergency fund. Do you have any upcoming repairs for your home? How are you going to pay for this? Would you like to take a vacation and not go into further debt? We’re going to take a look at emergency funds and “sinking funds” in a minute but keep in mind that once your budget is complete, all of your income will be allocated somewhere. This process will most likely take a month or two (or more) before you are comfortable with budgeting so don’t beat yourself up things don’t work out as planned.
5. Create an Emergency Fund. We’ve put together 5 Simple Steps to Start (or add to) your Emergency Fund. These are some basic steps to get you in the habit of saving. How quickly you are able to build up your Emergency Fund will depend on your personal situation. If you budget savings you are more likely to stick with the savings plan than if you take the “wait and see” what’s left over at the end of the week approach. Again, allocating every dollar of your income will give you the most direct control of your financial situation.
6. Use “Sinking Funds” to save for specific goals. A sinking fund is simply a place to save money for a specific goal. Each month you set aside an amount of money towards that goal. What are some examples of sinking funds? Birthdays, Christmas, Vacation, Home Improvements, Car Repairs. The list is endless depending on your specific needs. When you set up your sinking fund, determine how much you will need and by what date you will need the funds. For example, if you would like to save $100 for your child’s birthday and you have 10 months until you need to access that money your goal would be to save $10 each month.
Now that you’ve learned the budget basics, is your ultimate goal to be debt free? Be sure to check out our 3 Strategies to Pay Off Your Debt to help you with that journey.
Have you been budgeting for a while? What are your favorite budget strategies? We’d love to hear your ideas!
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