I know you don’t want to hear this but the answer is simple. Create and stick to a budget. If you’ve never done it before creating and sticking to a budget can be difficult. This is why it’s important to decide why you are doing it before you start. Will creating a budget reduce the stress on your life? Will it help you achieve your financial goals? Do you have financial goals? Figuring out why you are doing this will keep you motivated when the going gets tough. I don’t love my job and I don’t want to be doing it when I’m 60, so I am budgeting to save for an early retirement.
When Melissa and I decided to make a concerted effort to improve our financial situation the first thing we decided to do was find out where our money was going. We weren’t making large purchases all the time, but the amazon packages were coming a little too frequently. We started to track every penny we earned and spent. It’s eye opening to see how much you spend on frivolous things, but it’s important to see where you are so you can decide where you can cut back and what you can completely eliminate.
Ok so you tracked your finances for a month. Now lets create that personalized budget. I suggest starting by creating categories for all of your fixed expenses like rent/mortgage, utilities, phones/internet, car expenses etc. From there you can create categories for other anticipated expenses such as clothing, entertainment, childcare etc. Here are some typical budget categories to start with, but again this is your personal budget so make it your own:
- Transportation expenses
- Medical Costs
- Home maintenance
You can create a budget based on your first month of tracked expenses. At first it may be tight but as we came to find out we were spending more than we needed to in many different categories. In future posts we will go over some of the potential areas to cut costs so you can put less into bills and more into savings.
What does a good budget look like? Most Americans live paycheck to paycheck and aren’t utilizing a budget so any budget is good. With that said a popular breakdown is 50/30/20 where 50% is bills/ necessary expenses, 30% is non-necessities, and 20% is savings. Maybe you are starting at 70/30/0 or something similar, that’s ok we all have to start somewhere. As you continue on your journey you will see those numbers shift drastically. Its a rather simple concept if you want to save more you either need to make more or spend less. The concept is simple but the implementation will take time.
If you want to obsess as much as I do you can create your own spreadsheet to track your budget, but if you are looking for some good premade tools there are a bunch out there. In addition to my spreadsheet we use EveryDollar and Personal Capital. I will go into more detail in future posts on these and a few other budgeting tools.
As you review your expenses from the previous month and try to plan for the next month you will see that things will need to be tweaked from time to time. A few examples of things you will need to factor in are annual or semi-annual bills, and emergency expenses. You need to make sure and plan for these things well in advance. One way you can do this is to set up small savings accounts and put a small amount of money each month to prepare for the expense. If you know you have an annual insurance premium of $1200 dollars you can set aside $100 a month so you won’t have a large expense to deal with unexpectedly. You might also consider starting an emergency fund where you funnel your excess money each month in order to try and save 3 to 6 months worth of expenses in case of job loss or an unforeseeable emergency.
Does this seem overwhelming? Still not convinced you can do it? Try and start small. Make a commitment to budget for 3 or 6 months and see how it goes. I guarantee you will see the impact on your finances and will be convinced of the power of budgeting.