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Budgeting is finding a level of sacrifice you can live with, and believe me, you can sacrifice a lot more than you think to reach your goals.
Take a long, hard look at your life and figure out what’s important to you. What are your true values? What are your dreams? If you could do anything free of judgment from others, what would it be?
Now look at your finances. Do they currently support following these dreams? For most of us, the answer is no.
We have debts that enslave us to banks and credit card companies. We throw money away on useless things like Starbucks and cable TV.
But don’t worry. That just means we have some work to do. Creating a budget is a good first step. You must face your finances head on. Look at how much money you have and where it’s going.
Why You Should Create a Budget
When I was in high school, I took a “life skills” class designed to prepare us for the real world. We took aptitude tests, learned how to write a check and fill out a job application, and what to say when the manager at McDonald’s asked about our strengths and weaknesses.
What they didn’t teach us – and what I feel would have been a much better use of our time – was how to create a budget and manage our money. There was no mention of financial independence or spending wisely – just get a job and start writing those checks!
You are trained to be a consumer from childhood, but you don’t have to buy what these companies are selling. By budgeting (and sticking to your budget), you take back control. You decide what you’ll spend your hard-earned money on.
To really be successful with budgeting, you must be willing to sacrifice, to live outside the status quo, to say NO and not give a damn what anyone thinks. Rebel against the mainstream and find your own path. Don’t let marketing companies and banks define your happiness.
In this post, I’ll show you a method of budgeting that works for any family. It’s not difficult, but it will take time. If you’ve never budgeted before, it might take a lot of time.
But this is the first step toward taking back your life.
You can do it!
Step 1: Calculate Your Income
Before you can budget your money, you need to know how much you make. In this post, I will assume you have a fixed monthly income that stays relatively the same.
If you have a wildly variable income, budget for the lowest amount you can expect to receive and put any extra towards savings or debt.
You can create your budget using a spreadsheet or pencil and paper. It doesn’t really matter. Just get your numbers down in an easy-to-read format.
Add up all the income you receive in a month.
I am paid bi-weekly and Andrew is paid once a month, so our income might look something like this:
|My Paycheck #1||$1,100|
|My Paycheck #2||$1,100|
The total income is the amount you need to budget every month. I recommend using zero-based budgeting, where every dollar is accounted for.
Step 2: Calculate Your Monthly Bills
Calculating your expenses takes a little more effort. To make it easier, break down your expenses into categories. Start with your monthly bills – things like rent, utilities, and insurance.
|Natural Gas||$ 40.00|
|Cell Phone||$ 46.68|
|Car Insurance||$ 43.09|
|Trash Service||$ 29.21|
|Life Insurance||$ 18.84|
You can adjust your budget from month to month as needed. Right now, it’s just important to get a reasonable number down for each expense.
If you know the exact amount of each bill, for things that have a fixed monthly rate like cell phones and internet, budget to the cent. Don’t include debt payments – things like car payment, student loans, credit cards, etc. – in your monthly bills category. You’ll create a separate debt category for these items.
You may have monthly bills not listed in our example budget. Some things to consider include:
- Cable TV or Satellite
- Netflix, Hulu, Spotify, or other subscription services
- Newspaper subscriptions
- Health Insurance
- Homeowner’s Insurance
- Property Taxes
- Alimony and/or Child Support
Quarterly or Yearly Bills
For bills that are due quarterly or yearly, such as trash service or car insurance, take the total amount and divide by the number of months until due. Budget this amount for each month.
For example, our bill for trash service is due every six months. The total is $175.26. I divided this by six and arrived at a monthly budget of $29.21.
If you’re creating your budget in the middle of a bill cycle, like four months into your six-month period for trash service, divide the amount by four so you’ll have enough to pay the bill when it comes due. Adjust your budget after the new cycle begins.
Step 3: Calculate Your Monthly Expenses
Monthly expenses include groceries, transportation, clothing, entertainment, pet expenses, healthcare, etc. – anything that you spend money on every month. In our household, we use the envelope system for spending in these categories.
|Pet Expenses||$ 50.00|
|Total Expenses||$ 600.00|
If you’ve never had a budget before, it might be difficult to decide how much to allow for each of these categories. You’ll probably have to refine these numbers over time. To get you started, here are the averages an American household spends:
- Groceries: $337 per month. This only covers food purchased at the grocery store, not alcohol or restaurants.
- Pet Expenses: $50 per month. Include vet visits, medication, food, toys, etc.
- Transportation: $450 per month, not including car payments. Include expenses for car repairs, bike maintenance, license renewals, etc. in this category.
- Entertainment: $195 per month. Include movies, books, concerts, events, alcohol, etc.
- Clothing: $150 per month
- Healthcare: $120 per month. Include medication, doctor’s visits, dental work, eye doctor, etc. Health insurance is handled in Monthly Bills above.
- Miscellaneous: $59 per month on personal care and $55 per month on housekeeping supplies. You can divide these into separate categories if you like.
You may have monthly expenses not listed in our example budget. Some things to consider include:
- Restaurants: $262 per month is the what the average household spends. Include all meals away from home.
- Gifts and Holidays: $94 per month. Include Christmas, birthdays, anniversaries.
- Home Repairs: $120 per month is the average, but it’s generally recommended that you set aside 1 percent of the purchase price of your home per year for maintenance and repairs.
- Child Care: Varies depending on how many children you have and what type of care they receive. Budget accordingly.
- Organization Dues: Include if you belong to a professional organization for your career that requires monthly or yearly dues.
Remember, these numbers are averages, and you want to be better than average. Try to budget less than the average American.
Transportation, entertainment, clothing, and restaurants are categories you can budget MUCH less for. Spending $450 a month on transportation or $260 a month on eating out just isn’t necessary, especially if you have debt to pay off.
NOTE: Dollar amounts were taken from the Consumer Expenditure Survey published by the U.S. Bureau of Labor Statistics, November 2017.
Step 4: Calculate Your Debt Payments
Include monthly credit card payments, student loans, car payments, and personal and consumer loans. The only debt you won’t include in this section is your mortgage, which is handled in monthly bills.
|Student Loan 1||$ 250|
|Student Loan 2||$ 150|
|Car Payment||$ 400|
|Personal Loan||$ 50|
|Capital One||$ 130|
|Visa Card||$ 25|
Log in to all your credit card accounts and find out the minimum payment due. Repeat for all your other loans. The minimum payment is the amount you budget for.
Most importantly, stop using your credit cards immediately, even if you think you can use them responsibly for rewards or points.
Don’t do it. Stop now.
Take all your credit cards out of your purse or wallet, place them in an envelope, and lock them in a drawer or safe. If you absolutely can’t be trusted, cut them up.
Step 5: Calculate Savings and Extra Debt Payments
First, add up all the previous three categories. This is the minimum amount you need each month, and anything additional should go towards savings and paying off debt.
In our example above, the household’s total expenses are $2,995.08 and the total income is $4,000. This leaves $1,004.92 for savings and debt.
Savings/Extra Debt Payments:
|Extra Debt Payment||$ 4.92|
Before you begin paying off debt, you should save a small emergency fund of at least $1,000. This should be easily accessible. We keep our emergency fund in our savings account, so we can easily transfer funds to checking if we need them.
In our example above, the household would save the $1,000 in the first month of budgeting and put the extra four bucks towards debt. The second month, they would put the entire $1,004.92 towards debt.
If you’re debt-free, you can create multiple savings categories for things like a new car, house, furniture, electronics, or any other big purchase you need to save for. You also want to save for retirement and/or wealth building after paying off all your debt.
Extra Debt Payments
We are using the debt snowball method to quickly pay off our debt, but you can also use the debt avalanche or whatever method works for you – just pay off as much as possible each month.
- Debt Snowball: List all your debts from smallest to largest. Put all your available money toward the smallest debt first. Once it’s paid off, take all the money you were putting towards that debt including its minimum payment, and apply toward the next debt on the list.
- Debt Avalanche: List all your debts from the highest interest rate to the lowest. Put all your available money toward the debt with the highest interest rate first. Once it’s paid off, take all the money you were putting towards that debt including its minimum payment, and apply toward the next debt on the list.
The debt avalanche saves more money over the long-term, but the debt snowball allows for earlier triumphs as you knock out individual debts.
What to do if Your Expenses are More Than Your Income
If your expenses are more than your income, you have a problem and you need to cut the fat.
Cut out everything except what is essential to keep you alive. Rent or mortgage, utilities, food, and transportation to work are the only necessities.
After the basics are accounted for, prioritize debts until you can pay them off. If you can’t afford minimum payments on all your debts, work on the ones you can until they’re paid. If you’re in a bad financial situation, apply for a deferment on student loans while you pay off credit cards.
It might take a while to climb out if you’re in this deep, but it can be done. Don’t give up hope. With a proper budget and willingness to sacrifice, you can be free.
I believe in you.
Now get out there and face the world with your new budget! Don’t let anyone sway you from spending your money the way you decide.
Do you have any budgeting tips you’d like to share? Be sure to leave a comment below. I would love to hear from you!
More Posts in the Personal Finance 101 Series
This is the first post in my Personal Finance 101 Series. To continue, see the following posts:
How to Track Your Spending – (Part Two) After creating a budget, the single most important thing you can do to control your money is track your spending. You should know where every dollar goes to make sure you’re sticking to your budget. Learn three different methods of tracking and choose the one that works best for you.
How to Save Money – (Part Three) Saving money doesn’t come naturally to everyone. My natural inclination is to spend, and I had teach myself how to save. After quite a few failures, I finally figured out what works. In this post, I’ll show you how to save money for emergencies, retirement, and all the other fun stuff you want.
How to Pay Off Debt – (Part Four) Are you ready to pay off the debt that’s been holding you back? With a good repayment plan and some self-discipline, you can be debt-free faster than you think. Learn how to face your debt, set attainable goals, and create a repayment plan that works with your budget.