Do you find yourself running low on funds several days before payday or living paycheck to paycheck? Undoubtedly, your budget has felt the effects over the past few years of increased prices on consumer goods nearly every time you go to the grocery store or fill your car up with gas. To help get your finances organized, here are 10 simple steps that you can follow to create a budget and start meeting it each month:
1. Add up all sources of income
The first thing that you need to do is have a clear understanding of the money that you have coming in each month. This gives you the framework for your budget because now you know the limits within which you can spend your money. Make a spreadsheet or list of all of your monthly income sources:
- Child support
- Investment or interest income
2. Account for expenses
- Fixed expenses—mortgage/rent, auto loan, insurances (health, life, auto, home), 401k/IRA contribution*, personal/signature loans
- Variable expenses—utilities, food/consumer goods—just estimate these items, but make sure you stick to those estimates when spending the money each month.
*Notice that 401k/IRA contribution is listed as an expense. Even though it is optional, you should look at it as a necessary expense that you must budget in each month. Making this a part of your budget each month will set you up for financial freedom during your retirement years.
3. Calculate your disposable income
Add up all of your income and all of your expenses. Once you subtract all of your expenses from your income, the amount that is left over is your disposable income. From the disposable income, you can set aside additional money in a savings account, have some spending cash, or just have money set aside for any unexpected expenses that pop up during the year.
4. Make spending adjustments
At this point, you need to take note of what you are spending your money on. If you find that you don’t have enough income to cover all of your expenses, you are going to have to start making cuts to your spending.
What are the least necessary things that you are spending your money on? Is there anything that you are spending money on right now that you don’t really need? This is where you look at everything that you are spending money on and decide what you can cut.
Some quick items to look at:
- Cell phone plan
- Cable or satellite package
- Clubs/memberships that you are paying for but don’t use
- Expensive habits like eating out or getting coffee.
5. Limit credit card use
Only charge on your credit cards each month an amount that you are able to pay off when the monthly statement arrives in the mail. You don’t want to let the balance carry over month to month because most credit cards have high interest rates that compound daily. Paying only a minimum payment toward your spending will take years (maybe even decades) to pay off.
A credit card should not be used to cover the shortfall of your monthly expenses. Not only does this allow you to create unhealthy spending habits, but you are also setting yourself up for an increasing debt that you won’t be able to pay off without additional income sources.
6. Use cash when possible
After creating a budget, it is easy to see how much money is left over each month that is considered expendable. Obviously, by using cash, it is impossible to overspend. Once the cash that you have set aside for the month is gone, the spending stops. For instance, if you have budgeted $100 from each paycheck to go towards groceries, only take $100 with you to the store.
7. Be a money savvy consumer
- Clip coupons — also look for stores that offer to double your coupons.
- Use money saving apps such as, Checkout 51, Shopkick, and Grocery Pal.
- Purchase items when they are on sale. For example, stock up on chicken or beef when it is on sale and put some in the freezer for later, rather than buying it at a more expensive price later.
- Comparison shop — the internet makes it easy to look up the price of an item at multiple stores or online shops to figure out where it is offered at the best price.
- Most stores have websites that feature weekly ads as well as an opportunity to sign up with your email account to become a member. Take advantage of these offers to receive valuable coupons, promotions, and savings events information.
8. Budget for unexpected costs
- Savings account — even though interest rates are low now, putting money into a savings account is still a good idea. If you set up direct deposit, that money will go there before you get your paycheck, making it much easier to save when the money is taken out of your paycheck directly without you ever having to see or think about it.
- Emergency Fund — it is suggested that you have at least six-months salary set aside in case of a life emergency, such as an accident or the loss of a job. These funds can help get you through if something were to unexpectedly happen. You will still be able to pay your monthly bills, even if there isn’t any current income coming in.
9. Save for the future
- Retirement account — if your employer offers a 401k or other similar retirement plan, you should contribute the maximum matching level. For example, if you employer matches up to 4%, that is the level to which you want to minimally contribute, otherwise, you are turning down “free” money.
- Open a Return of Premium Life Insurance Policy — While this type of life insurance policy provides protection for a certain period of time, it also provides a sort of forced savings account. If the benefit is never used, the policy holder ends up getting all of the premiums back.
10. Review your budget periodically
Once you have done all of this, you will need to check back on things and make sure that the numbers are still working for you. As income levels change or expenses go up or down, you will need to adjust things accordingly.
For instance, if you get a raise, decide how that money will be spent — maybe put part into savings and put the rest toward paying off a credit card bill. Also review things like insurance (sometimes with your financial advisor) to make sure that you have a policy that covers you adequately, at a competitive rate.
While budgeting may not always seem like an easy thing to do, by taking these simple steps today, you can start planning for a secure financial future tomorrow. Remember, even the littlest step that are taken now can add up to drastic differences down the line.