Do you find yourself running low on funds several days before payday or living paycheck to paycheck? You already know you need a budget, but you may resist the idea of creating one because you have been unsuccessful at following budgets in the past.
To help get your finances organized, here are 10 simple steps that you can follow to create a budget.
1. Add up all sources of income
The first thing that you need to do is know exactly how much money you make and where it is coming from. Make a spreadsheet or list of all of your monthly income sources:
- Child support
- Investment or interest income
2. Account for expenses
Figure out how much money you spend every month. Make a column on your spreadsheet or list for all of your monthly bills or expenses. Include both fixed and variable expenses.
- Fixed expenses—mortgage/rent, auto loan, insurances (health, life, auto, home), 401k/IRA contribution*, personal/signature loans
- Variable expenses—utilities, food/consumer goods—estimate these items, but make sure you stick to those estimates when spending the money each month.
Be realistic with your spending habits. It’s easy to miss credit card expenses for shopping or eating out.
3. Calculate your disposable income
Add up all of your income and all of your living expenses. Once you subtract all of your expenses from your income, the amount that is left over is your disposable income. The rule of thumb you should aim toward is to budget 50 percent (or less) of your gross pay for living expenses.
4. Make spending adjustments
At this point, you need to take note of what you are spending your money on. The chances are your living expenses represent way more than 50 percent of your income. 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 need?
Some quick items to look at:
- Cell phone plan
- Cable or satellite package
- Clubs/memberships that you don’t use
- Expensive habits like eating out or getting coffee.
5. Limit credit card use
Pay off your credit card balance each month 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. If you only make the minimum payment toward your credit card debt, it could take years (maybe even decades) to pay off.
A credit card should not be used to cover the shortfall of your monthly expenses. It will create unhealthy spending habits and a pile of debt.
6. Use cash when possible
If you struggle to keep to your budget, consider only using cash. When using cash, it’s impossible to spend more than you have. Once the money 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
Take pride in being a frugal consumer. Clip coupons — also look for stores that offer to double your coupons. 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 higher 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
Your first financial planning priority should be to create an adequate emergency fund.
The rule of thumb is to have enough money to cover your living expenses for three to six months 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 happen unexpectedly.
9. Save for the future
Once you build your emergency fund start investing as much as you can in tax-efficient retirement accounts. If your employer offers a 401k or other similar retirement plan, you should contribute the maximum matching level. For example, if your employer matches up to 4% of your paycheck, make sure you contribute at least that much. Otherwise, you are turning down “free” money.
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. Consider paying off your credit card bill or investing in your retirement fund. Also, review things like insurance 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 smallest actions can add up to huge differences down the line.
Gina Young is an accomplished finance writer who has written for publications including Examiner.com, Lexington Law, Talk Markets, CreditRepair.com as well as her own blog (Money Savvy Living), giving budgeting and frugal living advice. With a bachelor’s degree in Accounting and Finance from Ashland University and a MBA from Indiana Wesleyan University, Young has impressive credentials in many aspects of investing, retirement planning, and personal finance.