By creating a budget, you make a plan for your spending, you tell your money where to go, and you ensure that you have enough money for the things you need so that you can avoid debt, save money for the future, and have financial stability in your life. Getting on a budget can put you on the path to that financial security and success that we are all seeking. In a society where having stuff is cool and having debt has become the normal way of life, I encourage you to explore a different way and truly set your family up for success, and to avoid the stress that comes along with a financial mess in your life. My husband and I have been through the wringer. We married young, eventually filed bankruptcy, and have worked our buns off to get into a good place financially. It’s not a one time thing that you do, your finances will be a journey that will have ups and downs throughout your life, but a few basic principles can get you into shape with your financial situation.
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How to Budget Your Money
Figure out how much debt you have
You would think that the first step in beginning to learn how to budget your money would be to look at your income and expenses, however, I bet there is a reason you are wanting to get on a budget. Maybe you are looking to save money, or maybe you have debt to pay down. If you don’t have any debt, feel free to skip those sections in this post. However, I know for the majority of us, we have some debt to deal with- and don’t forget about your student loans, car payments, mortgage, etc… those are debt, too! Though, I do think they should be treated differently. Your first step is to face the debt you have accumulated, if you haven’t already. I recommend gathering any statements you’ve received recently, and even pulling your free credit report to see what is showing there, for any old debts you may have forgotten. This part may take some time, but gather all of those, and take out a scratch piece of paper or maybe a notebook you’ve dedicated for budgeting.
You can also use printables to help organize your finances.
Write down each debt that you owe, no matter how small or what category it falls into. Then, contact those companies and find out the total that you owe, and the minimum amount due. If you find some debts that have been forgotten, there’s likely not a minimum amount due if it has been sent to collections. However, most companies just want the debt paid and will work with you on a payment plan. If they won’t work with you or they try to demand the full amount now, I’d just hang up (yes, just hang up) and write down $25 or whatever amount you estimate you can afford to send them biweekly or monthly.
I find that some companies have aggressive collections departments and they’ll always try to bully you into paying the full amount or a large sum of the amount you owe. If you haven’t been on a budget, you likely don’t know what you can afford, but they won’t turn away your money. You can use any statements to send in whatever payment you can afford, or ask the person on the phone where to send your payment and how to notate it so that it is applied to your account. Contacting these creditors can be intimidating, but don’t stress it and just get it done so you can move forward in your process.
Figure out how much income you are working with
The next step in this process is to take a look at your monthly income. If you and your spouse or partner have regular jobs with consistent paychecks of the same amount, this part is easy. Just write down what you both get paid each month. If you have a variable income, I recommend looking back through your history of payments received or income for the past 6-12 months, and averaging the amount over that same time period to get a monthly estimate.
Write down your income, and just keep that figure in your mind. In order to find out if you are making enough money, or if you have too many expenses, we’ll have to figure those up first.
Figure out the total of all of your bills and irregular expenses
During this step, you’ll want to take your notebook or budget printables and take a look at all of your bills. These are things like electricity, water, car insurance, etc.. all of those essential expenses that make up your life. It can be helpful to comb through the last 2-3 months of your bank statements just to be sure you don’t miss anything. Write down each of these expenses and then write down the due date and the monthly amount due for them. If you have a bill such as electricity that varies, get your best estimate of an average or just use the highest amount you’ve paid in the last 6 months to be on the safe side. Don’t forget all of the little things, like Netflix, that you pay monthly. While these aren’t necessities, we know they are going to be paid each month, and likely they’re taken from your account without you even thinking about it, so include those here.
Also be sure to think about things that come up throughout the year that need to be budgeted for. Some examples of these might be home owners association fees that are due once a year, or vehicle tag registrations due once a year. Try your best to consider all of these irregular expenses and make a note of them. I recommend doing sinking funds for these expenses, but however you handle them, it’s just important to know that they are coming and to be prepared.
Determine your current spending habits
Here’s where we are going to look at all of the extra-curricular spending that your family takes part in. This includes trips to Target, dining out, shopping, and any other expenses you have that aren’t necessary to your household. To do this, I find it best to print 3 months of your previous bank statements, then grab a couple of highlighters in different colors. Decide a category for each highlighter. These could be dining out, groceries, extra shopping, gas, clothing, etc.. whatever categories you find your family doing a lot of spending in. Make yourself a “key” on the first page of the first statement, so you know which color belongs to which category, and then go through the statements highlighting each of the different types of spending your family does. Once you’ve done that, you can easily go through and add up a total for each type of spending. Write that on the first page next to your key. This tells you how much spending you are doing on things that aren’t necessary and things that can be reduced, if needed. You’ll be surprised by some of these amounts most likely. It’s always a bit shocking to see how many extra trips to the grocery store we make outside of our weekly trip for groceries. All of the small spending that happens throughout the week adds up, which is why it is important to take a moment to look and really analyze your spending.
Determine your goal spending habits
Take a moment to look at your spending categories and see how much you spend on the non-essentials. Did anything surprise you? Is there any category that you feel you could definitely reduce? Here is the point in the process where you need to take your monthly income amounts and deduct your bills and expenses, and deduct any minimum payments on your debt. What are you left with? This is the amount you have for extra spending (and we haven’t even talked about savings yet, keep that in mind). Do you make enough to cover the amount you’ve been spending? If so, great! If not, here’s where you’ll need to adjust some things, and set some goals for your spending. The important, obvious things are groceries and gas, you can set an amount for those that you’d like to stick to, and then assess the rest. It may be that you simply cannot afford to have dinners out, or go shopping on non-essential stuff, and that is okay. Write down your spending goals for each category and try to be as realistic as you can be, and also don’t use up the remainder of your income because after this we are going to talk about saving money.
Find out ways to reduce spending
There are a lot of ways to reduce your spending, whether it’s cutting out anything unnecessary, or reexamining your bills to see what can be cut there. For your bills and other essential expenses, they may be essential, but is there anything you can cut or reduce? For example, can you cancel Netflix and still have some entertainment at home? (I totally understand keeping it if you’ve cut cable.) But, could you cut cable? We use a combination of programs, including Hulu Live, Netflix, and Disney + that all equal out to be less than it would cost us to have a full cable or satellite service. Could you lower your monthly cell phone costs? There are a lot of plan options available, including switching services or using prepaid services if you aren’t under a contract. Comb through your bills and expenses and see what can be reduced. This is so important if you have more money outgoing that incoming.
Find out ways to make more money
If you are struggling to bridge the gap between income and expenses, there are lots of ways to make extra money, and a quick Google search will give you more ideas than you know what to do with. The best way for you to make extra money is going to depend on your family and circumstances. Some quick ideas include starting a side hustle such as selling on Etsy, or doing grocery delivery or meal delivery on your off times with companies like Shipt and Doordash. We live in a time now where there are lots of options available to us. However, keep in mind that none of these are a guarantee, and if you can afford to get a 2nd part time job with a guaranteed paycheck, that may be the best option if you cannot reduce your expenses enough to cover them all with your income. It doesn’t have to be a permanent situation, just long enough to get rid of some of the debt or find more ways to reduce expenses.
Determine a savings goal
Once you’ve reached a point where your expenses are covered and you have additional money each month, you want to make sure that you are saving money. You can choose an amount goal for each month or a percentage goal. It is totally up to you, and I don’t like to tell people specifically what to do with their money, but there are so many reasons why saving money is important, whether it is to be prepared for unforeseen events and emergencies, or saving for retirement. It goes a lot deeper than this but on the surface level to start, pick an amount to save and make that your goal every month. Even if you only save 10% of your income, if your family brings home $3000/month for example, that’s $300/month or $3,600 per year. That’s not too shabby if you aren’t already in the habit of saving money. If you are in the habit, or you get in the habit, look for more ways to save more money, and eventually you should start looking into ways to earn with your savings and ways to save for retirement, too.
Make a plan for your money
Now, once you have your income, expenses, spending categories and goals, and savings goals, you can make a plan for your budget every month. You’ll want to map out your income, expenses, estimated spending, and savings goal for the whole month. Then, what I like to do is go back to my list of bills and take note of the due dates. I do my best to work those around my paycheck dates in a way that helps me pay things on time and avoid late fees. Divide your expenses among your paychecks and make a note of what days you plan to actually pay those bills for the month. A monthly budget worksheet or finance calendar can be really helpful for this. Then, when you get paid, you know exactly what you are going to pay, what you are going to save, and how much money you have left over for what spending categories your family has.
How to pay down debt
When it comes to paying down debt, I’m a huge fan of Dave Ramsey’s snowball method. This involves paying your minimum amounts due on each account, and then focusing any extra debt payments towards the smallest amount. If you don’t have additional funds to do this and pile extra money towards your smallest debt, revisit your unnecessary expenses and double check that there is nothing else that can be cut to add to your “snowball”. So, for example, let’s say you have your smallest debt which is $200 owed, and the minimum monthly payment is $25. Now let’s say you’ve cut enough on your expenses to put an additional $50 towards paying down debt. This means that you have more than the minimum payment to pay, you’ll be paying $75 towards that debt until it is paid. For a $200 debt, this would take 3 months. Then, once that debt is gone, you move to the next debt. Let’s say that it has a balance owed of $225 and a minimum payment of $40/month. You’ll pay that minimum payment, plus your snowball amount, which includes the $50 you freed up in your spending, and that $25 minimum payment from the debt you already paid off, plus the $40 minimum monthly payment for the debt you are currently focusing on. That’s a total of $115 in your snowball for that debt, which means the total of $225 due can be paid in just 2 months. Then, you continue this process onto the next debt, continuing to add your “snowball” amount to the minimum payment of the new debt you are focusing on.
Give every dollar a purpose
This is another Dave Ramsey principle that I believe in strongly- that every dollar you earn should be given a purpose. When you get paid, every dollar of your paycheck should be allocated to go towards bills, other spending categories, savings, or debt. It’s when we don’t consider our income and the extra money going into our bank account that we make it really easy to spend that money on things that we haven’t planned for, and that don’t align with our financial goals. That’s why you need a plan every month, and every payday, for what you are doing with your funds, so that you know where your money goes.
Continue to track income and spending
You’ll likely find it necessary to check in multiple times throughout the month in order to make sure you are on track with your plan, and sticking to your goals. Keep track of your spending throughout the month to ensure that you aren’t over spending in any one category, and adjust accordingly as you go. I typically re-write my budget 2-3 times throughout the month, just because I’ve had to make adjustments, move things around, or otherwise change my plan to account for something unexpected, or a category of spending that is different than what I predicted when I did my planning. It is important to be flexible and willing to revisit your budget, make changes as needed, and adjust things as you go. Again, budgeting is not a one time thing, and it is definitely a process that you will go along, but it is so worth it.
The best way I’ve found to stay accountable is to check in with your spouse or partner through weekly or biweekly and monthly budget meetings to make sure everyone is on the same page with the plan. If you want an easy way to track your spending each week between everyone in the household, I like using an easy expenses printable where I can write things down and then revisit it at the end of the week or throughout, if needed. As you get used to your budget and how things need to go, you’ll have to check less and less, but forming good habits takes time, so initially you’ll likely spend a lot of time looking at your budget. You could also do an app that connects with your bank account and keeps track of spending categories and things for you, such as the Every Dollar app. The first few months of budgeting it might seem frustrating or like it is too much to keep track of, but I encourage you to prioritize it, you won’t regret it.
I hope you have found something useful or some inspiration in these tips I’ve shared on how to budget your money. If you have any ideas that I’ve left out on how to get on a budget and stay on track, or any questions, leave them in the comments below.
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