A Budget – The First Big Step
Do you ever run out of money and wonder how there can be so many days of the month left before your next pay check? If so, let me ask you, do you have a budget? I would guess you probably don’t have a budget. If that’s the case, do you really know where your money is going each month??? You need a budget!
Just as no two fingerprints are the same, no two budgets are the same. While I know everyone is different, I am going to break down budgeting for a diverse group of people. Some of the income and expenses won’t apply to you, while others will. I know everyone isn’t burning cash buying coffee at Starbucks, but we all need to know where our money is going. Creating a budget will help you do just that.
Using Excel to Make a Budget (not yet)
Some people want to create a budget by jumping straight into Excel or an budgeting app because it makes the math easier. While it is good to switch to a computer eventually, I recommend starting with paper and pencil, then later moving your numbers to a computer or app. This way you don’t have to worry about formatting or anything like that. Let’s just get the info down first. You will be far less likely to get distracted this way. The paper won’t have Facebook installed or receive any notifications that will distract you. It is just the truth of your financial life.
Laying out the details of your financial life will help you be accountable. It might be tough at first, but it will also be liberating. If you are burning cash, and have no idea where your money goes or why you can’t make it through the month, your budget will help you get that clarity. That clarity will put you in control of your money, rather than your money controlling you.
Calculating Income
Let’s start by listing all of your income. This is money you have coming in. Think of all income.
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Salary
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Alimony/Child Support
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Social security
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Side hustle/Uber
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Recycle bottles
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Whatever other income you might have.
Add all that up. This is your income pile. That’s what we have to get you through the month. There is nothing extra. Let’s make sure you don’t go over that number. You aren’t spending one cent more than this amount. We are going to work hard to avoid debt. Not all debt is bad, but you should not be going into debt for your daily living expenses. To avoid debt, you will need to live within your means. This budget is the first step.
Calculating Expenses
Now let’s think of expenses. This is going to be a work in progress because what you think you spend and what you actually spend can be very different. Expect some surprises!
For the first few months we need to keep receipts and keep track of what you spend so that you can quantify it. Some months your expenses will change. For example, your electric bill will likely shift from month to month. Keeping your receipts for a few months will help you get the info you need to learn about where you money is going, and then we can adjust.
There are apps for keeping track of expenses, and you can use them going forward. For now, stick with pen and paper. Let’s start with what we know for sure, and adjust over time. If you get into a habit of tracking your expenses, you will be very in tune with what you spend, and that will help you reach success. Part of the problem is having no idea what we spend money on or how much we are even spending. Our budgeting is going to fix that. The other day someone told me that just realized they spend about $900 eating out that month. They were shocked. That is the power of paying attention to what you spend.
Get an old shoebox or a big envelope, and start putting your receipts there at the end of the day. That is the data we need to make this successful.
Categories of Expenses
To make things easier, I have listed common expenses in categories. You might think of more expenses you have as time passes and you start tracking. That’s fine. Add them as you think of them. Like I said, it’s a work in progress.
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Charity
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house related stuff (mortgage, rent, property taxes)
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utilities (electric, water, gas, internet/phone)
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Insurance (health, life)
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Fixed bills (student loans, credit card debt, child support, medicine)
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Cell phones
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Food (groceries)
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Food (eating out) Broke them up on purpose so you can see what you spend
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Transportation (Car insurance, car payments, gas, public transportation, tolls)
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Child care
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Clothing
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Entertainment (Netflix, Spotify, movies, going out)
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Gym/Fitness
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Investments
Many of these are self explanatory, so I will go through them each very briefly. This is not the order we will pay things in. This is just for listing them, so we minimize expenses slipping through the cracks.
Charity – For many people, charity is very important. If you are giving, list it here.
House – List out the things that are relevant to the place you live. What do you have to pay just to be able to live there, with a roof over your head?
Utilities – This is what makes your house livable. Depending on where you live and what you do there might be some other costs, but use the examples I gave as a guideline.
Insurance – Different families have different types of insurance. Some have separate health insurance payments, or life insurance payments. If you listed your renters or home owners insurance with the House costs, that is fine. We just need to get it all down.
Fixed Bills – Let’s write down all of the bills that you need to handle each month. Think about debts you have that are due each month without fail. Student loans, credit card debt, child support, and medicine are things that must be taken care of, so they must be accounted for in the budget.
At this point, we are making good progress. There is more to go. Maybe this is a bit tiring, but it will be so worth it. I promise.
Cell Phone – I listed cell phones separately because it is a significant expense in many homes, and perhaps a place we can cut later.
Food – There are two food categories, and there is an important reason why.
Groceries are what you need for your daily food consumption. Unless you eat out every day, your grocery bill is likely significant. Groceries can include disposables like diapers and paper towels. Think of groceries as things you buy at the supermarket or convenience stores.
Next is your Eating Out expenses. Listing your Eating Out expenses will give you a clearer picture of your spending. If you are eating out everyday, we have a great place to start with our cost cutting.
Transportation – List all your costs that have related to moving around. It might be a gas, it might be a bus pass. You can list tolls, car insurance, and anything else that helps you get around each day.
Child Care – If you have a tuition bill you didn’t list in the Fixed Bills section, add it here. Do you pay for day care? Baby sitters? List all that here.
Clothing – You may or may not buy clothing each month. Some do. If you are buying clothing regularly, put that down here.
Entertainment – This one could be a small fortune. Going out? Doing things for fun? List all that here. Even if you stay in, but you have extra bills as a result, like Netflix or Redbox, list all of that here.
Gym/Fitness – Do you have a gym membership? Trainer? Country club membership? Basketball or bowling league? List it.
Investments – If you are putting any money away after you get your pay check each month, list it here. It might be an IRA, a college savings fund for your kids, even extra padding for your checking account. List it all.
If there is something I haven’t added, list it. If you think there is something big I have missed, let me know. I am happy to add it. Like I said, this is a work in progress.
Analyzing your budget
Add up all of your expenses. Is this number larger than your income? If so, we can clearly see that there is a problem. There are two ways to fix this problem. You can either 1) raise income and 2) lower expenses. Pretty simple right? It might be simple, but it is not always easy.
Increasing income isn’t easy for most people. So let’s start by seeing if we can cut down some of these expenses. There are a couple of places that are usually pretty easy to find some fat we can cut away. Let’s go through each section and see if we can work some magic.
Charity – There are different opinions about whether you should be giving charity if you are not coving your expenses each month. Perhaps in lieu of money you could donate your time. Not only will it help your budget, it will likely be more fulfilling.
House – Moving to a less expenses home or neighborhood isn’t easy and can itself incur extra costs. If you realize you are paying way too much for your current place, consider moving. Otherwise, let’s go through some of the other expenses first and see if we can meet our shortfall.
Utilities – This is a great place to cut back. Start by shutting off those lights and not letting the water run. Your parent likely told you to shut the front door because you were letting the heat or air conditioning out. They were wise to do so. Utilities can add up quickly. By being conscious about turning off lights and not leaving the air conditioner on while you are out, you can save a bunch of money. Also consider switching to energy efficient bulbs. They are way less expensive than they used to be, last much longer, and can save you a bunch of your energy costs. You can really make a difference by cutting back on utilities.
Insurance – This one isn’t easy, but you can usually save some money if you shop around. This is particularly true if you have had a policy for a while. Call a new broker and see if they can get you the same coverage you currently have, but for less money. You might be surprised what you find.
Fixed Bills – This one also takes some leg work, but can add up quickly. If you are a good customer, call your credit card company and see if they will lower your interest rate. If they say no, tell them you want to switch to a different company. They like your business, so they might be helpful.
Student loans are the same thing. It’s important to note, you DON’T want to just lower your monthly payment but keep the interest rate the same. That will only make the debt cost more in the end since you’d be paying if off slower. You want the debt to grow as a slower rate. That is why you need to change the interest rate.
If you pay for medicine each month, talk to your doctor about switching to a generic version of the medicine you take. If it exists, it can save you some money.
Cell Phone – SAVINGS ALERT! You can very likely get a better deal by calling a different cell phone provider to find what it would cost for a plan similar to your current plan. Once you have those numbers, call your current cell phone provider and let them know what the other company offered. They will either keep your business by offering a discount or you switch and save with the other company. Nowadays you can even keep your same phone number. Let me know how much you save on this one.
Food – For your grocery list, you can check out generic brands as well as get into store coupons. Invest $1 a week buying the Sunday paper. There are a ton of coupons there. It will be worth the investment.
Find the grocery store that sell items at a better price. It might mean driving a few extra blocks, but the savings could be significant. Only buy at a convenience store that which you need quickly and must have. Otherwise, shop at the inexpensive grocery store so that you aren’t paying extra for that “convenience”.
If you are eating out frequently, you know you can save so much money here. Pack a lunch for work, and cut back on going out to dinner. Try some cooking videos on Youtube. You can save a lot by cooking for yourself. You will have a ton of fun doing it too.
Transportation – Could you carpool to work to save money? Check your tire pressure to make sure they are filled to the right levels. That will help your car drive more efficiently. If you work close to home, consider walking to work sometimes. It will save on gas and get you some exercise.
Child Care – If you need the child care for work, there isn’t usually much you can do to save here. See if there is a different place that might cost less. Everyone’s situation is different, so just be creative if an opportunity exists here.
Clothing – If you are buying clothes monthly, do you NEED these close? If not, forget it. One great tip is to postpone purchases for 24 hours. If you still feel you NEED the item after thinking about it overnight, go for it. You will be surprised how many items you don’t NEED, especially when you take a break to think about it.
Also, buy clothes at the end of the season. They will still be cool next year, especially when you enjoy wearing them because you know you got a deal on them 🙂
Entertainment – SAVINGS ALERT! If you are going out and having a good time, you know you are spending too much. If you are spending a lot of money on entertainment, be real with yourself. Start cutting back and see if you are enjoying life. If you can cut back on this or any of the other big expenses, you will feel like you have more extra money each money, because you will. Wouldn’t that feel great?
Gym – Fitness is great, and totally necessary. Paying top dollar for it might not be so necessary. Call around town and see if there is a less expensive gym.
Try some fitness videos on Youtube. There are so many to choose from. You could watch a new workout video each day and never repeat.
Are you paying for a trainer? Do you NEED a trainer? If so, do you need them as often as you currently go? Maybe you could scale that back? There are a lot of fitness solutions if you think about it and get creative.
Investments – I am someone who thinks everyone should be investing. If on the other hand, you are running up debt each month just to live, you are probably losing money by investing rather than paying that debt off. Credit cards have high interest rates, and your average investment is not out performing your debt. Paying off debt will save you a lot of money in the form of lower interest charges. If you are debt free, maybe an investment is right for you. We will be discussing this a lot in the future.
Need more income?
How did it go? We you able to find places to cut back? How much better does your budget look with these changes? Is your income higher than your expenses? If not, it is time to make more money. There is only so much you can cut back before you need to make more money. There are side gigs you can do to help you make a bit more. Maybe consider improving your skill sets so you are more employable and can get a higher paying job.
Final thoughts
Your budget and your financial life is important, and you should realize that. This is your life, and you need to make sure you can afford to live it. No one is going to care for you forever. The government isn’t going to fix your problem. You are in charge of your life. There can be no excuses. You can’t say it is impossible because you are bad at math or not good with numbers. If you need professional help, seek it out. You can probably find free or inexpensive help. I am helping you for free. You probably have friends and family that are good with this sort of stuff and would be happy to help you.
Whatever you do, get the help you need to make your budget. It is the first step to getting your financial life in order. A few years (maybe even just a few months) from now, you will be so happy you did.
