The first part of getting out of debt and enjoying financial freedom is knowing how much money you have to spend. You may think you know, but if you are like most people, you only have an idea and may think you are earning more or spending less than you actually are. The best way to really know is to keep a monthly budget.
Yes, that dreaded but necessary household budget. It’s actually really simple to do and once you start understanding how much money you actually have to spend, you can start making the necessary adjustments to have more. Once you have a basic budget created, you can see places where you are spending more than expected and places where you can make cuts. Here are the steps you need to take in order to create a basic budget. Once you master this you can include things like saving for retirement, college, etc. But first, let’s start with the basics:
Step 1 – Decide the time period for your budget.
Some people like to track daily and others weekly, I prefer to track monthly because most of my bills are paid on a monthly basis. This doesn’t mean I only update the budget monthly, I can update it throughout the month. It means that I am taking a monthly snapshot of my finances.
Step 2 – Know your Net income.
Your net income is the amount of money you get to take home after all of the taxes and other expenses are taken out of your pay check. Do you know how much you take home each month? Without knowing how much you actually take home, there is no way to know if you are outspending what you are making. There are other ways of generating income (investments, interest, etc.), but for creating a basic budget only you need only look at your net income.
Step 3 – Know your Expenses.
Expenses can be fixed (occurring every month), variable, or emergency:
Fixed expenses include; mortgage, phone, car payment, etc. The amounts for fixed expenses typically don’t change.
Variable expenses are expenses that you have control over. It doesn’t mean they aren’t necessary – but you can determine the total you will spend. Some examples of variable expenses include; clothes, vacations, and monthly food bill.
Emergency expenses are not only unplanned, you can’t always control the cost. For example, you weren’t planning to replace the roof but it started to leak and now you have an additional expense to pay for.
Step 4 – Start tracking and stick to it.
You can track your budget in a notebook, use a spreadsheet like Excel, or one of the online budgeting applications. Whatever you choose to use doesn’t matter, the most important thing is that you update it regularly. Here is an example of a basic budget:
Net Income – Total Fixed Expenses – Total Variable Expenses = Grand Total
Step 5 – Review the Budget Regularly
At the end of every week, look to see where you are on your budget. Review your list of expenses. Are there any you missed? Add them onto the budget. Do you think you will spend what you expected for the month? Will you spend more? Will you spend less? Try to come as close to your estimates as possible. Make adjustments to next month’s budget based on what you actually spent this month.
One Final Thought There are many more tips and tricks to come, including creating savings, reducing expenses, and planning for the future. This is based on what works for me. If you have dire financial troubles, you may want to seek professional financial guidance.