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In school, we spent years learning about science, language, math, and social studies from textbooks, but we spent very little time – if at all – on real-life skills like saving, making, and managing money. If you ask me I think every school should teach budgeting. Creating a budget is critical to our financial success.
But somehow, we’re supposed to just “pick up” how to manage our finances, as if innate to us! The truth is, money management is not a skill that we’re all born with – it’s acquired.
The good news is that you can easily learn the skill! Creating a budget plan that works for you takes a little time.
CREATING AN EFFECTIVE BUDGET
The best way to acquire financial security is to have an effective budget. With a sound budget, you’ll be able to see exactly where your money is going and be able to get your money working for you instead of against you.
You’ll be able to figure out where you can cut spending so that you can start paying down debt and saving for your future.
You’ll also be able to plan for fun things like vacations and a new car if you know where your money is going. To indulge in life’s luxuries without destroying your bank account, you need a budget!
Not to worry, though. It’s not as bad as it sounds. It’s actually quite simple and can be a lot of fun once you get the hang of it. Yes, I said budgeting can be fun! I see budgeting as a challenge and love how budgeting actually allows me to free up more of my money because I know exactly where every dollar is going.
Let’s get started on creating a budget that works!
HOW MUCH DO I MAKE EACH MONTH?
The backbone of any budget is based on how much income you have coming in each month. Even if your income is lower than you’d like, you can still budget successfully, but it’s important to know what you have to work with to create a balanced budget.
When budgeting, it’s critical that you use your net income as opposed to the gross, that is the amount after all deductions and taxes. Doing so will give you a more accurate representation of what you have. For all practical purposes, what is being deducted from your paycheck is money that isn’t available to spend.
If you have a variable paycheck, using a close estimate should work in most situations. A realistic estimate can be gathered by totaling your income from the past 3-6 months, and then divide by the income you received in that time.
You can use a free budgeting app like Dave Ramsey’s EveryDollar which is free to use. I like it because it forces you to budget each and every month. There are many other budgeting apps out there so find the one that fits you. You can check out my post on finding the right budget planning tools for more information.
WHAT ARE MY FIXED EXPENSES?
There’s no way around it; we all have bills to pay. Some bills vary from month to month, but there are others that are constant. Many loans are structured, so you pay the same amount every month.
For example, your car or home payments are fixed expenses. Rent and cable bills are also usually the same amount every month. Keep in mind though that a car payment is a debt, so that will go in the debt section even though it is a fixed amount.
Some examples of common fixed expenses are:
- Mortgage or rent (including HOA fees)
- Car insurance
- Property taxes
- Home insurance
- Life Insurance
- Auto Insurance
- Health Insurance
Take some time to make a list of your fixed expenses and total the result or use a budgeting app or budget spreadsheet to make it easier.
WHAT ARE MY VARIABLE EXPENSES?
This is where making a budget gets a little bit tricky. Not every bill is the same amount every month. You don’t always spend the same amount at the grocery store or on gasoline. It’s easy with the fixed expenses, but here there is room for error. As you will soon see this is also the area where you can make the most changes. For now, use an average amount of each variable expense for your budget.
Some examples of common variable expenses are:
- Car maintenance
- Car Gas & Oil
Take a few minutes to list your variable expenses and total the result. A good strategy is to go through your recent credit and debit card purchases to see where your money is going.
WHAT DEBT DO I HAVE?
I keep debt in its own category because the whole point of a budget is to eventually get rid of your debt and be able to save money. Looking at debt in a separate category helps with this.
Types of debt:
- Student loans
- Car payments
- Credit cards
- Loans and lines of credit
WHAT ARE NON-ESSENTIAL EXPENSES?
There will always be things that we want, but don’t necessarily need. These types of purchases fit into the non-essential expenses. The difficulty here is that we often confuse what we want with what we need. Most non-essential expenses can be cut completely so that’s why I like to keep them separate when first creating a budget so that you can see them clearly.
Some examples of non-essential expenses are:
- Excessive amounts of clothing and shoes
- Entertainment (video games, movies, books, magazines)
- Gym membership
- Eating out
Make a list of non-essential expenses and total them up. Ask yourself: Do I need everything on this list? Is there anything I can cut out for now? You may find after a few months that you don’t even miss these wants.
WHAT ARE MY TOTAL EXPENSES?
Write down all your fixed expenses, variable expenses, debts, and non-essential expenses and add up the total. This total will be your base expenditure for the month.
This is the bare minimum you’ll need to make to have a balanced budget. If you make more, that’s great. If you don’t make more, then go back and look at your variable and non-essential expenses, like entertainment, new clothes, or even your grocery or electricity bill, and find ways to lower these balances. Keep reading for more information and help with lowering your balances and earning more money.
EARN MORE THAN YOU SPEND
The only way to create a workable budget is to adhere to this one simple rule: Earn more than you spend. If you cannot do that then you will have to spend less. How? Check out some of my most popular blog posts that will help you reduce your expenses and I included resources to help you earn extra money!