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Create a budget in 5 steps
Saving is the first step to financial freedom. Budgets are necessary for savings. Budgets are easy to make and you have choices among different methods.
A budget allows you to see where all your money is coming from and where it’s going. It’s a distribution method for you money. It’s also the building block for savings and for having money.
You can create a budget in writing, but I recommend using a spreadsheet, like excel or Google docs. It can be hard to stick to a budget when you have a small paycheck.
However, going thru the budget process every month helps you to increase your discipline and confidence in handling your money.
Create and stick to a budget and you have unlocked the first key to financial freedom.
A budget is a tool that helps you see where your money is going, how it gets distributed.
A budget also helps you create saving habits and goals. These can help you save more, make more, invest more and retire early or take extra vacations and on and on.
What type of budget do I need?
There are different ways to do a budget. The type of budget is your big picture for your money and you should feel comfortable with it. Your needs and personal style are important considerations when choosing a budget method.
You can start tracking your spending with these Spending Trackers
A popular method is the 50/20/30
This is a good method for first time budgeters who are looking to save money. Take your take home pay, after taxes, health care premiums etc. and distribute it like this.
50% goes to yours and your family realneeds. Housing, food, car payments, gas, electricity.
20% goes to your pretend needs or discretionary items. Vacations, eating out, entertainment etc.
30% goes to making you wealthier. Your debt payments, savings, investments. This part is what really makes you rich. So be generous, you can allocate more or less depending on your situation.
Another budget method similar to this is the 60/20/20.
This method is more aggressive on the saving side. You spend 60% of your after tax income, 20% for living expenses and 20% for your discretionary expenses. If for example your take home pay is $3,000, you’ll spend $2,400 and save $600.
The pay yourself first method
This method is for aggressive savers.
The goal with this budget type is to save, save and save more. So you start with how much money you want to put away in the bank, brokerage account or under the mattress (mattress not recommended).
Here you take your saving amount and whatever is left goes towards paying for your needs and wants. If you are short, then you make extra money somehow.
This is the anti-budget method. No formal budget, just take your saving percentage and use the rest of the money to pay the bills.
The envelope system
Some people swear by this method. This is a good method for people who need discipline or need to be able to stick to tasks.
You only spend from the envelopes. Divide each envelope into categories and only use the money assigned to that category. You can use cash, some people use prepaid cards. When the money is gone, you’re done spending.
How to keep track of your money
Paper. Some people feel comfortable with paper or bullet journal entries.
Spreadsheet. This is my favorite form. There are many free and downloadable budget spreadsheet. You can customize them according to your needs and style.
Apps. There are budget apps. Check your bank internet page, some banks are giving free access to budgeting apps. There are also Mint, Personal Capital and Acorns.
Budget example – how you can do it
Step 1: Calculate your income after tax. Money from salaries, extra income , rental income, dog walking income etc. go on this line. If you don’t have a fixed income every month, do an average per month.
This is the number you’ll use to subtract all your expenses from.
For example this is how it may look;
Dog sitting income: 500
Online store income: 200
That will be all for the first step
Step 2: Calculate your monthly expenses
Your expenses include the things that you must pay, non discretionary, like rent, mortgage, telephone bill, electricity etc. In addition, your discretionary expenses, these are the ones you don’t need to make. Make sure to include all your monthly expenses.
This step is very important. This may be a messy step for some people and a straight forward one for others. But, even if it is painful for you, it must be done. This is the number you can later adjust to save money every month. If possible try to break down each category. List the expenses that are essentials and the ones that are non essential.
Total expenses: $1,670
Step 3: Calculate your net income
This is your positive or negative income after you deduct all your expenses from your total income. A positive number is good, it means you bring more money than you spend.
A negative number is bad, it means you spend more than you make. Whatever the result, this number has powerful information that you can use for planning your personal finances.
Step 4: Implement and Adjust
Put your budget into action, implement. How are you going to manage the budget. Where are you going to cut from? How can you make more money?
These are some of the questions you and your partner can discuss. Don’t beat yourself up if you go over budget sometimes. Do give yourself a reward every now and then when you feel good about your money management.
This is the step where you can start thinking about creating more income streams than just your paycheck.
Step 5: Set Money goals
Now that you’re into the groove of all things budget is a good time to set goals. Remember that a budget is a tool that can help you set yourself up for freedom. Try to reach the 20% saving level, but if not, you can still save 10% and work towards moving up in the future.
Here are some examples of goals setting for your money; save a set amount every month, create an emergency fund, get rid of debts, start investing small amounts, create a vacation fund, start cutting on non essential expenses.
Look at your finances from new angles and possibilities. If you fail to implement your budget don’t sweat it, move on but do stick with it.
Bonus: Hold yourself accountable. Place a reminder on your refrigerator or on your computer to remind you to do your budget on a schedule date.