Welcome to Budgeting 101.
In this “class” we will take you through a step by step process to create a budget. You can get fancy and put things into excel. Use an online program like Mint. But really, paper and pencil will do the trick just fine…
Once you have gathered your prefer tools it is time to get to work!
Step 1 – Start With Your Income
Before you can decide how you are going to spend your money, you need to know how much money you make! What we are looking for here is your take-home pay (aka income after-taxes). In the simplest terms this means the actual amount of money that you receive from working. When calculating this figure make sure you include ALL of your income. Got a side hustle? Include it. Do freelance work? Include it. Get regular checks for walking your neighbors dog? Include it. I think you get my point….
Step 2 – List Your Expenses
Now for the fun part…Listing your expenses! This is where you figure out where all of your money needs to go. Start with the big, must have items like rent/mortgage, utilities (electricity, gas, water, etc), student loans…Often these are easy to write down because they are fixed, meaning they have a set payment or amount that you pay every month. Next we are going to move onto the items that might fluctuate every month (otherwise known as variable payments). This would include things like food, dining out, entertainment, your cell phone bill, etc…You might not know exactly how much you spend, but try to come up with a pretty good idea. As you revisit your budget you will get more accurate with time.
So do you have everything? Really, really? Did you include those expenses that come up only a few times a year like HOA dues, insurance premiums, etc…? To put those expenses in there figure out how much you pay, and about how often and calculate how much that is on a monthly basis. For example…If you spend $200 on HOA dues every four months, you would want to include a line item for $50 HOA dues on a monthly basis.
Now that you have everything listed you are ready for Step 3!
Step 3 – Set Expenses Equal to Income
Add up all of the items you listed in Step 2. Now what we are looking for is for our Income to EQUAL our expenses in what is called a Zero Sum Budget. In other words, Income = Expenses. Now, if you spend more than you earn your are going to want to find a way to either increase your Income number or lower your Expenses (more on this later). If you are spending less money than you earn each month then we add an “expense” item in our budget for saving. Your budget equation would then look like Income = Expenses + Savings. Again, every dollar is accounted for.
Now you might be thinking that you don’t need to account for every dollar. If you have money left over you would put it into savings anyway, right? Well, the idea behind the Zero Sum Budget is that if you have a label assigned to every dollar you earn you will be less likely to spend it. If at the end of the month you are given the option of going out to dinner, but you only have money from your “savings” bucket will you really want to go? The answer may be yes (and rock it my friend)! But the point is we want you to pause and evaluate if whatever you are thinking about spending your money on is WORTH IT TO YOU!
And Voila! Finis.
You know have yourself a budget my friend. This is the first step in getting your financial house in order (Bravo!). Give yourself a pat on the back or a glass of wine! You have earned it.
Up next…Budgeting 201: How to put a budget to use