A simple budget…

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A simple budget

Ahhh! A simple budget. What? A simple budget? That doesn’t exist. Does it? Budgeting is complicated and it is not important. Right? Well, I want to tell you that budgeting is the most important tool that you have in your life. A budget is your guide on your path to financial freedom. It is the map of where your money is going and it helps you decide when and how you are going to spend it.

Most people think that preparing your budget is hard and that it takes so long to do. I will tell you that it isn’t and it is crucial for your future so you need to start one right now. So, let’s start.

Step 1: Calculate your income.

Make a list all of your income for the month. Include any side jobs or rental income. Remember to include all sources of income in your home.

Step 2: Financial Goals

Most people will decide what and how much they are saving for after they see how much money they have left. I will ask you to stop now and decide what are you working for. What are your financial dreams? Do you want to become debt free? Are you saving for a new car or a deposit for your next home? Do you want to pay cash your next vacation? Do you want to pay for your kids college?

Now, decide which goals you want to accomplish in the short- and long-term. Short-term goals should take no longer than a year to achieve, two years at the most. Long-term goals, such as saving for retirement or paying for your kids’ education, may take a lot longer to reach. These goals might change during time but identifying them will help complete your budget.

Step 3: List all your expenses.

Fixed expenses are all your obligations that are due every month. Some of these expenses are your mortgage or rent, utilities, insurance, car loans, credit cards, gym membership and so on. Then, write all of your variable expenses that change every month, like groceries, utilities, gas and others. It is important to include going out, your coffee trips, vet visits, gifts or anything else that know you will need money during that month. Look at your credit card or bank account statements. They will give you an idea on how much you actually spend on each category each month. This will be the scariest part of the process the first time that you write your budget but you need to be honest with yourself. The more accurate the numbers are, the better planning you can do.

Step 4: Make the budget

Now that you have all the info available, you will add up all of your income sources and then subtract up all of your expenses. If you have money available after paying your expenses, congrats! Now you can focus on that financial goals you set up earlier. If you don’t have money left, then you need to review what adjustments do you need to make in order to meet ends and achieve your goals. Can you need to change your cell phone carrier or change your plan? Can you cancel cable TV? Can you start bringing your lunch to work instead of spending $10 per day at lunch? These things might look simple but they will make a huge difference on how your budget looks.

It is really important that you set up a portion of the income to put into savings. If you’re not saving a portion already and you think it is difficult right now, I suggest putting a small portion into a savings account (with no access via a debit card). Start with 1% of your income but make a commitment to yourself to slowly increase this amount until you have at least 15% of your paychecks going into savings.

Step 5: Review and make adjustments

Now that you have successfully implemented your budget, it’s important that you review it on a regular basis. We have budget meetings at the end of every month but we take a few minutes whenever we need to if there is an unexpected expense that we need to review. So, do you have any expenses that need to be reviewed this month? Did you have money left on an area that you can apply to debt or savings? Can you change movie night to a stay at home Netflix night?

What other steps do you take while preparing your budget? How often do you review it?

 

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