Budgeting can seem like a daunting task. Nobody wants to see exactly how much they spent and then feel guilty about it at the end of every month, right? Well that’s exactly why you should have a budget! At lot of people like to use the term “spending plan” instead of “budget.” That’s exactly the point of a budget- to plan how you’re going to spend your money. For a lot of people who have a budget, it feels good to know that you are able to spend your money (up to a certain amount!) on things you want and that you won’t be overspending. The purpose of a budget or spending plan is to decide how you’re going to spend your income before you spend it. This is especially helpful for people who usually spend more than they make or people who want to save up money for something.
So how do you start budgeting? The first step is to make a list of expenses that you spend your money on. Go through your debit/credit card statements and write down what you have spent your money on for the past 2-3 months. Group expenses into categories like fast food, clothes, toiletries, etc. For expenses that you don’t pay for every month, such as an oil change or a haircut, take the total expense cost divided by the number of months in between the expense to get the amount you should save for the expense per month. For example, if you get a haircut for $30 every 3 months, it would be $30/3 = $10 per month. If you save $10 a month, every 3 months you will have enough to pay for a haircut. This is especially important for expenses that you may only have once or twice a year such as car registration, car insurance, taxes, etc. Next, add up your average expenses for a month to see what you spend each month. Finally, figure out what your net income (the amount that gets deposited into your back account) is per month. Remember to multiply by two if you get paid every two weeks! It is usually easier for most people to have a monthly budget as opposed to a two-week budget since things like rent and utilities are only paid once a month, but do whatever is easiest for you!
The second step is to see if your income is greater than your expenses. If it is, you have some extra money to month to be able to save for an emergency fund or a financial goal, or save more retirement, for example. If your income is less than your expenses, you have two choices- you can either decrease expenses or increase income. Even people whose income is greater than their expenses may want to think about whether they can decrease expenses or even increase income to pay off debt faster, or save for a money goal more quickly. The goal is to allocate all of your income to something- spending, saving, investing, etc.
Stay tuned for the future installments of “How to Start Budgeting” to learn how to decrease expenses, save money, make and stick to a budget, and track your spending.