When most people hear the word budget they cringe as it typically has a negative connotation to it. If you were to ask me about a budget a few years ago I would have done the same thing. But after years of starting and following a budget I now know that a budget is not restrictive as most would assume, a budget gives you the freedom to do what you want with your money.
According to statistics only about 1/3 of American families utilize a household budget, over half live paycheck to paycheck and less than 20% have enough saved to cover a $1,000 emergency. I didn’t want to be part of any of those statistics!
I originally started using a budget to help us get out of debt (you can read about how we did that here) but now it’s something that I will continue to do forever because IT WORKS!
A budget allows you to tell your money where to go instead of the other way around where you spend money and then at the end of the month you wonder where it all went. If you liken it to a sports team, let’s say football, the coach doesn’t just allow all the players to run onto the field and do whatever position or play each player wants with no direction. The coach has a plan and he executes it with his players and they each know what their role is and the play. The same thing should apply towards your money, only you are the coach! Quit spending money carelessly throughout the month with no plan. Assign your money before you spend it! It’s really simple and easy to do.
Every month we have a budget meeting where me and my husband sit down and go over our upcoming months expenses before that month starts. We assign every dollar a category and know where it is going.
There are different ways to set up a budget but I’m going to be discussing a zero-based budget because it actually works if you do it! It basically forces you to stay within your budget because you are putting your money where it needs to go before you even get your money. Let me explain how this works…
The first thing you will want to do is grab a pad of paper and pencil. You can also do an online budget by using an app that tracks your spending, there are many free ones out there that do this. I am more old school and I like to create a spreadsheet for each month and fill it out by hand.
How much are you making?
You will need to calculate your monthly income first to see how much money you have coming in. It’s amazing how many people don’t actually know how much money they bring in each month so be sure to get an accurate number. I write this amount as our take home amount, meaning after taxes and other payroll deductions, and I write down how much money is direct deposited into our account. You will want to include all other sources of income here too so you end up with one number of total monthly income, write this number down at the top of your budget as INCOME.
Irregular income? No problem…
If you have an irregular income you can still do this however, just write down what your lowest average is for any given month and use that as your starting point, any extra income you get that month is just going to go towards your debt or savings or whatever you are trying to achieve at that point. Just be careful to not blow any extra money not accounted for after you’ve created your budget, go back to the budget and see what you should apply it towards.
How much are you spending?
Once you know how much money you have coming in you now need to know how much you have going out. At first this can seem overwhelming if you’ve never tracked your spending but once you get your bills in order then it becomes easier and easier each month. My recommendation is to print out your last 3 months of bank statements to help organize and categorize where you spend your money. I did this thinking I already knew basically how much I was spending and was completely shocked at how much I was actually spending compared to what I thought I was spending. Just go through your bank statements with a highlighter for different categories like food, gas, bills, etc and get a 3 month average on where you spend your money. Expect to be shocked just like I was!
You will write down all of your monthly expenses like rent/mortgage, utilities like electric, water, cable, phones, etc. You also need to write down any recurring monthly payments from debt like car payments, credit cards, student loans, etc. Other budget lines may include things like auto/home/life insurance, medical expenses, child care, vet bills, gym memberships, savings, etc.
Most of the above categories will be the same amount each month except for electricity or medical bills and things that are not regular monthly occurrences. You can still put in an estimate for these categories based on previous months averages. So for example the electric bill is always different for us so I estimate how much that will be and when the bill arrives I go in and put the actual amount.
The next step is calculating and budgeting for daily expenditures. These are the categories like food, gas, household toiletries, clothing, entertainment, etc. This is where the cash envelope system really comes in handy, you can read more about how to start the envelope system here, but basically you will have some wiggle room here to really work some magic. The biggest place that most people can find extra money is in their food budget. In fact most people are way overspending on groceries and going out to eat and it takes up a huge portion of their monthly income. So if you’re currently spending $1000 on food each month for a family of 4 then you should realistically be able to cut that number down by one-third to one half of that amount with a little planning. You need to figure out what that number is for you and your family but I guarantee that you will be amazed at how much you can save in this category. There’s so many ways to cut down on your food expenses each month, just by meal planning and sticking to a list will help stay on budget tremendously.
Things like clothing, entertainment, and toiletries can be tightened up as well by getting a little creative. The only category that you can’t really change or tighten is gas because you’re still going to have to get to where you need to go so try tracking how much you’re spending in gas each month and allocate that same amount for the next month.
If you have any bills like insurance that you pay once a year instead of monthly you can still set aside what would be the monthly amount broken down into its own category so when the bill is due you already have that money set aside.
Figure out what’s leftover and turn it into a ZERO!
Now that you have written down all of your monthly expenses you will subtract all of the expenses from the income and hopefully there will be money left over. If not then you are spending more than you make each month and need to make further adjustments and make some cuts or find a way in to increase your income. You cannot succeed with money if you are spending more than you make each month!
Any money that is leftover is now allocated to either paying off your debt using the debt snowball method or if you have no more consumer debt (yay for you!) then you can assign that money towards your savings or other sinking funds like saving up for a car or a big expense like home repairs or a vacation fund. Since we are out of debt we are working on paying off our house early (you can read about how we plan to do that here) any and all extra money we have leftover each month goes towards our mortgage principal.
The key here is to make it a zero based budget, so that once you get done with your budget there is a big ZERO at the bottom because you have assigned every dollar a mission. It takes about 3 months to get your budget under control and work out all the tweaks so be patient and don’t give up hope. Also don’t get discouraged if you forgot to budget for a certain category or if something unexpected happens and you have to adjust. Life will happen and almost every month something comes up in our budget that we forgot or didn’t expect so we try to keep a little cushion in our checking account for these instances.
By doing this zero based budget you are now in control of your money instead of it controlling you, and that my friends is a wonderful feeling. Use your cash envelopes for your day-to-day spending and stay focused and disciplined because you now have the flexibility to create a budget that works for you. Put reminders in your phone to sit down at least once a month to work on your budget, make it a priority and I promise you it will payoff! This is the top book I recommend for anyone trying to get a budget started and getting out of debt, it is a how to that is a must read for everyone!