I firmly believe that the first step you should take in order to gain control of your finances is to create a budget for your expenses. Having a budget allows you to take a deeper look at your expenses and uncover areas where you might be overspending. A budget will also bring you peace of mind because you will no longer have to worry about having enough money in the event of an emergency.
I always hear people say that they want to get a better grasp on their financial situation but they don’t think a budget is necessary. Sure, it’s easy to say you’ll spend less money on dining out or that you’ll set aside extra money for your savings account but this rarely happens without a plan in place. The best way to stay on track and achieve your financial goals is with a budget. The budget you set for yourself will set the tone for your financial success.
Step 1: Find your net income
First and foremost, you need to know exactly how much money you are taking home each month. Your net income will be the final amount of money from your paycheck after all deductions have been made. Your budget will be based on this net income number, not your gross pay. Take note of what your take-home pay is after all pre-tax deductions, taxes, and any other deductions have been made from your paycheck. This is your net income and this is the number you will be using to base your budget on. You also want to take into account all of the money you make on a monthly basis – this includes side jobs, part-time jobs, or any extra streams of income you have.
Step 2: Track your spending
You can track your spending in a few different ways but the important thing is that you begin to track every single expense so that you have a clear idea of what you’re spending money on and how much of it.
Here are a few ways to track your spending:
- Use a notebook and pen
- Find a spreadsheet online or create your own in excel or google sheets, which ever you prefer
- Use an app that specializes in tracking your spending for you like mint
I personally use the spreadsheet method but either way you choose to track your spending is fine!
Step 3: Identify your goals
What are your financial goals and how can a budget help you achieve these goals? Are you looking to save more money for a rainy day? Do you want to cut back on certain areas of spending so that you have more money for a big purchase coming up? Are you looking to regain control of your finances so that you no longer need to worry about money all of the time?
Make a list of all the financial goals you want to accomplish in the short and long term. Short-term goals should take no longer than a year to achieve. Long-term goals, like saving for retirement or saving to buy a house one day, may take years to reach. Your goals don’t have to be set in stone and can change over time, but identifying your priorities before you start creating your budget will give you guidance.
A budget can help you achieve all of these goals and more.
Step 4: Create a budget
To start your budget, you will need to create categories for your expenses. I’ve listed out the below commonly used categories and subcategories – some may not apply to you so you can just disregard those! There’s a lot of advice out there for how much you should be allocated to each category but for now, we will just start by taking note of how much you’re already spending in each category.
- Categories for budget:
- Property taxes
- Home insurance
- Electric and gas
- Doctor visits
- Gym memberships
- Car payment
- Car insurance
- Public transportation
- Debt repayment
- Credit card debt
- Student loans and other loans
- Entertainment (this is fun money)
- Eating out/restaurants/bars/etc.
- Personal care
- Beauty products, hair cuts, and any other cosmetic spending
- Charitable donations
Don’t feel the need to follow specific rules but if you are looking for some guidance, there are a few commonly used budgeting formats that people use. A popular one is the 50/30/20 rule. This rule follows the principle that you will use 50% of your income on necessities, 30% on wants, and 20% on savings. This is just to give you an idea of a possible budget
- Basic utilities
- Minimum loan payments – Anything beyond the minimum goes into the savings and debt repayment category.
- Child care or other expenses you need so you can work.
- Personal care
- Shopping (clothes, shoes, etc)
- Emergency fund account
- Retirement accounts
- Long term savings account
The last step in finalizing your budget will be to find areas you think you’re spending too much where you can cut back, this is how you create a realistic budget and begin saving money for more important things.
There are a few categories you may not be able to adjust right away or much at all. These are your fixed expenses and they include your rent/mortgage, utilities, and transportation – these are the expenses that you most likely can’t change in the immediate short term unless you make a drastic move like finding a cheaper place to live.
If you’re looking to start by making more manageable changes, take a look at the less obvious categories that seem too high. Perhaps you spent $600 on clothes last month and you’re not sure how because you still can’t find something to wear…this is a sign that you should set a budget for this category to stop yourself from mindlessly spending.
Now it’s time to take a look at the categories that seem like fixed expenses but really aren’t. You might be looking at your grocery bill and saying “This is a fixed expense I can’t change this number” but you CAN! There are plenty of ways to decrease your grocery bill. Do you do all of your food shopping at Whole Foods? Do you find yourself buying tons of food that goes to waste? This could be because you’re walking into the grocery store with no plan. What has helped me the most is planning my meals for the entire week before heading to the grocery store and buying only the things on my list. It never fails and I rarely waste any food. I also religiously do all of my food shopping at places like Lidl, Walmart, and Aldi. They are extremely affordable and I get almost everything I need. I make the occasional trip to Trader Joe’s for the stuff I just can’t buy anywhere else but I avoid buying all of my groceries at places like Trader joe’s or Whole Foods because the price differences are pretty drastic compared to Lidl or Aldi.
Automate your accounts as much as possible. If you decided to set aside $500 a month into your savings account then you should automate this expense to ensure you save this money. You can automate almost all of your expenses – your monthly credit card bill, utilities, savings, and investments. It will save you a lot of time in the long run and you will never have to worry about paying a bill late and incurring late fees.
You may also need to revisit your budget and adjust as needed, perhaps there’s an area you underestimated – that’s ok because there is likely an area you overestimated as well!
The most important thing when creating a budget is to hold yourself accountable by keeping track of all of your spending. You would be surprised how quickly those $15 lunches can add up when you don’t track them. By tracking every purchase you are more likely to stick to your budget without going over in any category. There’s no reason you can’t achieve your financial goals with all of the tools and resources available out there – here’s to financial stability made easy!