When it comes to managing your money, working without a budget is not likely to lead you to financial security. Your debt situation won’t improve, your savings won’t grow, and you’ll miss out on the feeling that you can take care of a crucial part of life.
Having a financial game plan makes you focus on the way you use your money and helps lay the ground work for a bright future. This might seem daunting at first, but if you manage to work your plan, the rewards far out way the effort.
How much is coming in?
Knowing how much money you’re taking home every month (from all sources of income) is the first step. Remember, you need an accurate figure if you’re to make a budget that works. Calculate your net income, i.e., the money you are left with after each payday after all taxes and deductions. This final amount will help you tweak your expenses, and determine how much you can realistically save.
How much is going out?
The next thing you need to know is how much money is going out. Divide your expenses into two lists.
1. Fixed expenses
These are the same every month and include things such as a student loan and car payments, as well as your rent and credit card payments. Add saving to the list too. If you don’t, you’ll fall into the habit of allowing other expenses to determine how much (or if) you can save.
Remember, you don’t have to put a lot away; only what you can consistently manage. You’ll be surprised at how quickly it all adds up, and how motivated you’ll be to keep going once you see progress.
What to do with savings?
First things first, consider saving up for an emergency fund to cover any unforeseen “situations” that may surface. Once you have enough put away, keep going, but think about splitting the money you’ve set aside for two things: savings and paying off debt.
2. Variable expenses
These are the costs you have the most control over. Entertainment, travel, eating out, shopping: they’re all on this list.
Once you know what’s going in and what’s going out, you’ll have a clearer idea of what needs to happen with your personal finance.
If your monthly spending is greater than your income, start by looking at which expenses you can cut, or how you can boost your income. Your fixed expenses are untouchable at this stage if you’re making cuts. Instead, look at your variable expenses and prioritise what’s most important to you.
Still short? Your next move is to look at which fixed expenses you could scale back or cut. Adjusting cell phone or internet packages, getting a roommate to help with rent: these are the sorts of options on the table.
Balancing your income and expenses is the tricky part about budgeting, but it’s also where you’ll find the true value. Once you get it right, you’ll have a model for living within your means, and thriving financially.
Find a method that works for you. A low-tech option is to pay your fixed expenses online or by automatic transfers. Then, withdraw the money for your variable expenses and divide it into envelopes. Each expense gets an envelope – or more specifically, the amount of money in the envelope. Be flexible by boosting one envelope with funds from another if you must, but try to stick to your game plan.
If you’re into tech, try a budgeting app!
Don’t stress if you stumble at the beginning. Instead, take the knock and do better next month. As you improve, you’ll stop noticing what you’re doing – exactly how new shoes get more comfortable the more you wear them. When that happens, doors open!