Have you ever tried to lose weight? You cut out processed foods, reduce your sugar intake, and work out at least three days a week. But after a few weeks, the scale hasn’t moved, and your pants still fit a bit snug. So then you began to do the one thing all the fitness experts tell you to do, count calories. Once you start to count each calorie you consume, you are amazed at how quickly those calories add up, and you realize you are eating and drinking way more calories than you thought. Unfortunately, our spending is a lot like those calories. We may think we know how much money we have spent over the last month, but unless we track every dollar, we may be spending way more than we think we are. Making a budget is like counting calories.
What is a budget?
A budget is a plan you write down to determine how you will spend your money. You will know exactly how much money you have coming in, how much you need for bills and expenses, and what to do with any leftover cash. Basically, you are tracking each dollar that comes in and goes out. It might be a little tedious, but after a few months, you should have a good grasp on your spending.
How do I make a budget?
When making a budget, the first thing I recommend is to determine your financial goals. This will help you plan and stick to your budget. For example, when you go on a diet, you usually have a goal about why you are losing weight. It might be to feel more confident in that bikini on our upcoming vacation or improve your health to have more energy and live longer. Sticking to a budget can be challenging if you do not have a goal.
Common financial goals:
Pay Off Debt
Emergency Fund Savings
Saving For A Vacation
Saving For A Down Payment On A Home Or Car
Once you write down your financial goals, the next thing you need to do is write down your net income. This is often referred to as your take-home pay. The money you get to keep after all taxes and any other money is taken out of your gross pay like healthcare benefits or 401K contributions.
Now that you know how much income you have to work with each month, the next thing you need to do is write down all of your fixed expenses. This is all of your bills. Examples are your rent or mortgage, streaming services, internet, cell phone, utilities, and insurance, just to name a few. Also, don’t forget to include any debt you are paying back, like your car and student loans and any credit card payments.
The last thing you need to do is keep track of ALL your purchases each month. This will include groceries, eating out, movie tickets, hair and nail appointment, and that daily cup of coffee. If you buy anything, even a pack of gum for $0.25, write it down. Doing this will help you see where you spend all your hard-earned cash.
Now comes the not-so-fun part. Add up all your fixed expenses and purchase and deduct them from your net income. How much is left? Don’t freak out if the answer is zero or you spent more than you made. That is the whole point of a budget; to see where your money is going. Now that you know your spending pattern, you can take control and get on track to reach your financial goal!
Conscious spending is vital.
Take control of your budget with conscious spending. When you are on a diet, you choose to eat an apple instead of a cookie to achieve your weight loss goal. You can use that same type of thinking to achieve your financial goals. Let’s use the example of having the financial goal of saving $1000.00 for an emergency fund. You always want to give yourself a date when you want that goal to be achieved. We will give ourselves one year or 52 weeks. $1000.00 / 52 = $19.23 a week you need to save to have $1000.00 in one year.
Now look over all the purchases you made. What could you choose not to buy so that you can save that twenty dollars? Maybe you can make your coffee at home or bring your lunch to work. It shouldn’t be too hard to find the money. The bigger the goal, the more conscious we need to spend. Many years ago, when I was learning to budget, I realized I was spending about a hundred dollars a week at Target on clothes and other things I didn’t need. I just enjoyed going to Target. But, once I set the goal to save for a new car, I knew I had to do more than just say I won’t buy clothes at Target anymore. I had to stop going to Target altogether. I had no self-control once I entered the establishment. But by choosing not to go to Target, I saved $400.00 a month towards my down payment. If you want to keep that daily cup of corporate coffee in the budget, then maybe you will choose to eat out only twice a month instead of once a week.
Reduce fixed expenses.
You may be able to reduce some of your fixed expenses. For example, do you really need every streaming service and cable TV? Can you call your cell phone and internet service providers and see if you can get a rate reduction? You might be amazed at how easy it is to get your rate lowered. Can you get out of the gym membership that you never use? Look for any money you are spending on things you are not utilizing and cancel them.
What should my budget look like?
How much should I be spending on each category? Many people follow the 50/30/20 rule. This means you spend 50% of your income on needs, 30% on wants, and 20% on debt repayment and savings. It’s an excellent place to start. And as you develop good money habits and learn how to spend consciously, you will hopefully prioritize paying off debt and saving over making unnecessary purchases.
How do I keep track of my budget?
All you need is a pen and paper to start tracking. Many find making a spreadsheet helpful. If you need a budget tracker, I have put together one for you to purchase on Amazon. It is straightforward and easy to use. Just click on the affiliate link and it will take you right to the product.
What if my income is inconsistent?
If you are self-employed or if your income is inconsistent, here is my advice. Look at your taxes from last year. Find your taxable income, the money you made that you paid income tax on. Now divide this number by twelve. For instance, if you grossed $100,000 but after all your deductions, you were only liable for taxes on $40,000, use that number. $40,000 / 12 = $3,333. That is about how much per month you should be using for your budget. If your income is inconsistent, you may need to save up for several months. Then “pay yourself” the monthly amount you came up with. In our scenario, you would pay yourself $3,333 a month. Let’s say you make $12,000 a month during your busy season and then only $2500 a month the rest of the year. Saving a pool of money and then “paying yourself” a consistent wage each month should help you stay on track.
If you feel overwhelmed or need one-on-one help, I am here for you. Contact me today, and we can start working together to get your finances in order.