Making a realistic budget is the first and most important step towards financial independence and the life of your dreams.
Once you commit to trying a budget with an open mind, you will realize that budgeting is simply a way for you to make sure your money is put to work in a way that reflects your values and priorities.
Whether you are a doctor or a single mom, you will be able to see where every dollar is currently going and by making some small changes you can completely transform your finances.
If you need some motivation or some convincing that a budget is worth the time you will spend on it, see this article for my top 10 reasons everyone needs a budget.
Before we get started making that budget, I would like to point out that budgeting is not about deprivation.
If you feel that you need coffee every day from the artsy cafe down the street, account for this in your budget so that it doesn’t wind up interfering with your rent or your car payment.
It’s all about balance. I would never tell you to give up something you love.
There are a variety of apps you can use if you prefer them to a pen and paper budget, but for the purposes of this exercise, I would try getting everything down on paper (feel free to ignore me and use your favorite word processor if you prefer).
You can switch to an app anytime you want to if you prefer to track your spending with one.
1. Gather Your Bank Statements and All Pay Stubs/ Income Reports
- If you have multiple incomes, make sure to include your spouse’s information.
- If you are a freelancer or have irregular income, average your wages over the last six or twelve months (whichever you feel will be the most closely aligned with what you expect to make going forward) and look for patterns.
- Add everything together to get your income from all sources.
- While you are at it, take a look through your bank statements over the last month or several months. Are there any amounts that surprise you? For me, when I added up how much I was spending on fast food and lunches at work I received a reality check.
- Don’t be afraid to delve deep ( how much have you spent on clothing for the last six months? Entertainment? Etc.
- Keep digging until you feel like you know where every last dollar went and what you would like to reduce.
2. List All Fixed Expenses
Fixed expenses are any expenses that are the same month to month.
The list below includes expenses that are usually fixed monthly payments:
Rent or Mortgage payment
Cell phone bill
Medical Insurance premium
Childcare and support
This list is not all-inclusive, so be sure to utilize bank statements, etc. to locate any additional fixed expenses.
If you have bank statements available, try highlighting all your fixed expenses with one color or set of colors, and all your variable expenses with another color or set of colors ( I.e. fixed expenses are dark colors, variables in neons, etc.).
This can be very helpful if you are having trouble accounting for every dollar.
If possible, fixed expenses should be on auto pay.
This will save you money on late fees in the long run and make your budget even easier to maintain.
3. List All Variable Expenses
- Variable expenses are expenses that vary from month to month.
- Don’t shy away from the truth here.
- If you spend about 200 a month on clothes and getting your nails done, include that here.
- This is a judgment-free zone and your budget will only help you if you are thorough and accurate.
Contributions to charity
Personal Care ( shampoo, body wash, toothpaste, etc.)
4. Make Some Tough Choices
Add up all your variable expenses and fixed expenses and subtract them from your income.
If you get a negative number, you are living beyond your means.
If you don’t make some changes, you will keep incurring debt until you are drowning in it.
Don’t get discouraged. No matter how much debt you have, you can make meaningful changes once you have a plan.
Fixed expenses can be reduced by asking for lower rates or shopping around (on your auto insurance, for example) or by eliminating the expense completely.
For example, if you are paying for satellite t.v. switching to Netflix or abstaining (however temporarily) could save you up to hundreds of dollars per month.
Variable expenses are a bit easier to make changes to.
Maybe you could try shopping at your local thrift store.
You won’t believe the awesome books, clothes, furniture, and appliances you can find for just a fraction of the price of new items.
Review every expense with a critical eye.
Maybe Starbucks is a necessity but you could learn how to change your own oil or do your own nails.
After you have gone through each expense and decided if it needs to be reduced or eliminated, make any changes to your totals.
This is your new budget.
The money you saved can go towards your savings goals, vacation, retirement, or paying down your debts.
5. Act as CEO of your Budget
- Finally, decide how you will track your spending.
- You can use pen and paper that you carry around with you, a free or paid app, or you can even withdraw everything you need in cash and separate it into envelopes labeled with the name of the category you budgeted for.
- Also, be kind to yourself!
- You are only human and will eventually overspend.
- If that happens, adjust your budget however you can (reduce the next months spending for that category or any area you can reduce spending in, or look for a side hustle to earn some extra money, etc).
- Address it, own it, and move on.
I recommend that you re-evaluate your budget every month.
Take a few minutes to think about what did and did not work.
Update your goals and totals and make sure you feel happy with how you have every dollar working for you.
Congratulations! You’ve done the hard work, now sit back and reap the rewards.