Budgeting your hard earned cash doesn’t have to be overwhelming, nor does it have to cramp your style. If you use a budget correctly, you’ll know how much money you have coming in and going out, as well as where it’s going. Even better, you’ll know that you have the money on hand for bigger purchases like a car, a down payment on a house, or expanding your family. Here’s how to create one, in eight easy steps.
Track Your Expenses for One Month
First, spend a month tracking your expenses. Your only goal for this month is to write down every penny you spend. Pick your poison. A spiral notebook, a spreadsheet or your checkbook register. At this stage in the game, you’re simply gathering information, so don’t stress. Just spend a few minutes each time you spend money jotting down the amount you spent and what you spent it on.
Calculate Your Monthly or Yearly Income
Gather up your pay stubs or 1099’s. It’s time to figure out what you made last year. If you have the same job at the same pay that you did last year, you can simply use last year’s income for this step. If you’ve changed jobs, freelance full time or have additional sources of income, calculate what you estimate that you earn each month, then multiply by 12.
Categorize Your Monthly Expenses
This is the step where we put the information from step one to good use. Spend some time analyzing your spending from the last few weeks. Group your purchases into categories such as groceries, utilities, spending money, rent or mortgage and any other groups that naturally appear. If you need ideas for how to group your expenses, look online for a printable budget form.
Evaluate and Plan
Calculate your expenses from each category for the previous month. If they’re more than your income, don’t panic. This is the part where we plan how we’re going to make everything balance.
Take a hard look at your spending from last month. You may find, for example, that you’re spending $50 a month renting DVD’s and streaming television, but that you have no money to set aside for the future. Could you save money by signing up for a DVD subscription service? Can you cut back in this area and spend $25 and save $25? Apply this logic to each area of your budget, reducing expenses until the amount that you’re spending each month is less than the amount that you’re earning.
Track Spending Carefully to Avoid Going Over Budget
Now that you have a budget that works on paper, it’s time to put it into action. You may want to research online money management software at this point in the budgeting process. Some sites will track your categories for you as you enter each purchase, sending you an email or text alert if you’re close to going over your budgeted amount. Tracking your spending carefully is an important part of budgeting, whether you use software or a pencil and paper.
Each time you receive your paycheck, set a small amount of it aside in a savings account. If it’s difficult for you to pull this money out of your check, consider setting up a regular transfer or direct deposit into savings, so that the process isn’t as obvious to you. Saving for your future is essential, even if you’re only setting aside a small amount each week.
Make Paying Off Debt a Priority
Once you’ve got your spending under control and a bit in savings, dedicate some of your money each month to paying off your debt. Even an extra $20 towards a credit card bill will make a difference, so focus on finding any wiggle room in your budget and using the extra money to make debt payments.
Leave a Buffer in Your Account
If you’ve had issues with overspending or overdrafts in the past, it may be wise to set aside the first $100-150 you save. Leave this money in your checking account, but subtract it from your ledger. This allows you a small buffer in case you make a math error or an unexpected charge comes through. The first time you avoid a series of overdrafts due to a math error or a company accidentally double charging you, you’ll be grateful you had this buffer. Unfortunately, mistakes happen, so it’s wise to be prepared.
Divide Larger Expenses Up Throughout the Year
If you have large expenses yearly or twice yearly, such as car insurance premiums or holiday bills, take the time to budget for them now. Christmas comes at the same time each year, and your car insurance will always be due, so it’s time to stop letting these large bills take you by surprise. Instead, divide the total amount you’ll be spending by 12 and set aside part of this money each month.
If you’ve been living without a budget, being able to write a check for the car insurance or pay for your holiday gifts without stress will be a huge relief. When you design a budget and begin to truly make your money work for you, you’re already well on your way to financial freedom.