Are you looking to take control of your finances?
If the answer is yes, a simple but effective budgeting system can help you reach this goal. In the beginning, the budgeting may seem overwhelming and taking too much time. But if you create a good money management system it will help you to see where your money is going and how much you have left to save and spend.
Why do you need a budget?
Budgeting means managing money. Are you trying to pay off the debt, save money for retirement or increase your emergency fund? Setting up financial goals helps you to stay focused.
Take the time to set up your personal financial goals and make sure that they are realistic. You don’t want to get discouraged if for example, you want to save $70,000 for a down payment on a house in just a year when you only make $50,000.
I like to put my financial goals on a piece of paper and look at them from time to time. It reminds me that there is a purpose for why I’m doing this.
Once you finished setting up your financial goals, just follow these 7 easy steps and set up a budget.
Step 1. Collect all your financial information
The goal for creating a budget is to see a monthly average. So, the more financial information you can gather the better.
Put together in the folder (paper or electronic) your pay stubs, bank statements, recent utility bills, credit card statements, medical bills and any information regarding a source of your income and expense.
Step 2. Calculate your income
After you put together all your personal financial information, start with calculating how much money you have each month.
This step is simple if your only income comes from a stable job.
Typically, an income comes in the form of a regular paycheck where taxes are automatically deducted. So, use your payroll stabs or direct deposits to calculate how much money you bring home each month. This is your net income or take-home pay amount. Put it in your spreadsheet as a monthly income.
If you’re self-employed, combine your take-home pay from the past year and divide it by 12.
If you have an additional monthly income from your rental properties, child support or freelance job, add the amount to your monthly income.
Your main goal is to calculate the total income you receive on a regular basis.
It is important to know how much money you have coming in so that you know how much is left to save and spend.
Step 3. Calculate your fixed expenses
Most of the time budget is all about tracking your expenses.
If you don’t track your spending, you need to start. Your monthly spending should be divided into two groups – fixed expenses and variable expenses.
Fixed expenses are the ones where the amount to be paid remains the same most of the time. It’s an easy category which includes necessary expenses you must pay each month.
Start with a list of your fixed expenses:
- Rent or mortgage
- Car insurance
- Car loan payments
- Medical Insurance
- Student loan payments (if you have any)
- Utility bills
- Cable bills
- Cell phone bills
- Internet bills
Step 4. Calculate your variable expenses
Variable expenses are a category that changes from month to month.
- House maintenance or repairs
- Car fuel and maintenance
- Dining out
- Movie or concert tickets
- Gym membership
I know it’s hard to group these expenses together since they are not the same amount each month. But to make sure that you have a realistic budget, you’ll need to calculate every single expense.
Step 5. Determine your irregular expenses
I have a separate category in my budget for irregular expenses:
- Property taxes
- Car registration
- Medical Co-pays
- Christmas/ Gifts
- Vacations/ Travel
This category is for annual expenses. At the beginning of the year, I combine all these expenses and add them up to my budget. I try to project the number based on previous years and typically add $1,000 to the total for anything forgotten.
I use separate savings account for this fund and call it “Vacation Fund” I don’t want it mixed in with my regular savings account. We spend a lot of money on travels, so I like to save money for this fund each month.
Step 6. Compare your expenses to your income
Now it is time to compare your total expenses to your income.
Add up your monthly expenses (step 3, 4 and 5) and subtract this amount from your total monthly income (Step 2).
After subtracting your expenses from your income, you should have zero as your balance.
Zero as your balance means your income is equal to your expenses.
But you might end up with two other options in your balance.
Budget with negative balance:
You are spending more money than you make. It’s never good and your goal is to reduce some expenses.
The cost of discretionary expenses should be the first and easiest to cut.
Look at your variable expense’s category (Step 4) and list your discretionary expenses. Discretionary expenses is the money you spend on restaurants, entertainment, vacations, gifts, various membership, spa, and massages. This category of spending takes up a large chunk of your monthly budget.
When you really need to cut discretionary expenses, this is where you should start.
- Make your own lunch instead of buying it every day
- Stream a movie at home instead of going to the theater
- Visit the local library instead of buying books
- Use public transportation instead of driving a car to work
- Cancel gym membership and go hiking, biking, swimming or just walking
- Trim down on special treats: brew your own coffee and pack a healthy snack
Fixed expenses are harder to cut. But you can save a lot of money by doing so. Look at your big items or necessary living expenses and see where you can cut or negotiate a lower cost.
- Reduce your electrical bill by cutting down on energy consumption
- Cancel a cable and sign up for Netflix or ask for a special on your cable/internet package
- Cancel landline phone and use cell phones instead
- Ask for a re-assessment of your home value, if your property taxes are too high
- Negotiate a lower insurance rate for your house and car insurance policies
- Negotiate a lower rate for your student loan or consolidate your student loans
Budget with positive balance:
You are making more money than you spend each month. Congratulations!
Look at your financial goals and decide what do you want to do with extra cash in your budget. You can put more money into retirement savings or pay off your debt faster.
The ultimate goal is to have your income and expense categories equal in the amount of money you spend in both areas. This means all of your income is accounted for and budgeted for a specific goal.
There is a simple to use budget worksheet from Kiplinger.com. If you want to give it a try, open the link below, download the worksheet to your computer and open it in Ms Excel program. The worksheet is very easy to modify and use for your own household budget.
Household Budget Worksheet from Kiplinger
Step 7. Keep track of your budget
After creating your budget, you need to make sure that it is working.
You need to monitor and adjust it on a regular basis. It might sound boring and tedious, but this is your money managing system and you need to keep it under control.
Find a way to track your spending. It could be done electronically using Excel spreadsheets and software programs like Quicken, Mint or Personal Capital. But plenty of people still use an old school method and stick to a paper budget.
Money management programs: Quicken, Mint, Personal Capital
I like to use Personal capital and love how easy it makes to organize and categorize my personal finances.
Whatever system you use, you need to look and asses your budget once a week or once a month. Tracking your budget should give you a general idea if you are on the right path to your financial goals.
Here is a great related article from Internet Advisor: 14 Ways to Save Money When Working from Home
A budget won’t work unless all parties of your household are involved and fully on board. It will be a big mistake for not having agreements with your husband and your family. There will be no point in trying to cut on cable or electricity unless everyone agrees on it.
My husband and I are both involved in managing our family finances. Roman takes care of budgeting, paying off bills and credit cards. I am mostly involved in managing our investments. But we talk and go over our budget and finances regularly. It helps to know that everyone stays on track and we work together on achieving the same financial goals.
Putting it all together
Your budget is the foundation of your financial life.
Anyone can set up an amazing money management system on a paper. Making it work is quite another thing. This requires commitment and technique. Budgeting can be hard in the beginning, but if you stick to it, all your efforts will pay off. In the end, you’ll learn how to take control of your finances and to achieve your financial goals.
Do you have a budget? Share with us your budgeting tips!
You make a good point about importance of keeping track of your budget. That’s what most people fail to do. It’s so easy to set up everything digitally or on paper and after that forget to follow through with numbers. From my experience the best idea is to have one member of the family taking care of budget and then share it regularly with the rest of the household.
Sarah, I am so glad you found this post helpful! I agree with you that most of us struggle with keeping a track of our budgets. But it gets easier with time when you make it as a part of your routine.