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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 that works for you takes a little time to learn and a little discipline to stick with but in the end, it’s well worth the rewards!
MAKING A BUDGET THAT WORKS
The best way to acquire financial security and freedom is to have an effective budget. With a good 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 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 hard 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!
For your first budget, I recommend using a pencil and paper. You can grab free budget printables right out of my FREE RESOURCE LIBRARY or just use a notebook.
There’s something about physically writing down your budget versus just using a budget app or spreadsheet that will keep you motivated and on track!
Once you get the hang of budgeting (usually takes a few months) or if you just prefer to use an app, you can use a budgeting app like Dave Ramsey’s EveryDollar which is free to use.
If you love spreadsheets, try the Budget Planner from Simple Planning. Check out the free demo on their site to see all its great features.
When you create a budget you need to break it down into categories. I’ll go over the different categories and what should go into each one.
HOW MUCH INCOME IS COMING IN?
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 coming in.
For all practical purposes, what is being deducted from your paycheck is money that isn’t available to use.
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 dividing that by how many months you totaled up.
Write down all of your income sources and the amount from each source.
WHAT ARE YOUR 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 usually 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’s a fixed amount.
Mortgage while still a debt is good debt and can be kept in this category for now.
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
- Cable Bill
- Phone Bill
Take some time to make a list of your fixed expenses and total the result.
WHAT ARE YOUR 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 DEBTS DO YOU OWE?
I keep debt in its own category because the whole point of a budget is to eventually get out of 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
- Medical bills
For extra help on eliminating debt check out How to Pay off Debt When You Have No Money.
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 category. 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 how much your spending each month.
You will want to minus this amount from your income and see what you’re left with.
Any extra money needs to be allocated to a category. If you don’t have an emergency fund already in place then put any extra money towards your emergency fund until you reach $1000.
Once you save $1000 then start putting any extra money towards your debt payments until each debt is paid off in full.
If after doing your budget you find you’re in the negative, 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 expenses and earning more money.
Helpful Resources for Reducing Your Expenses:
- 101 Ways to Save Money
- How to Get Rid of Cable and Still Watch What You Want
- How to Cut Expenses and Spend Less
- How to Wash Dry Clean Only Clothes at Home
- Save Money on Homeowner’s Insurance (I Saved Over $800!)
- How to Start Couponing When You’re Busy
- Turn Your Receipts into 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!
Helpful Resources to Earn Extra Money:
- Earn Free Gift Cards Every Month
- Get Paid to Shop
- Best Places to Sell Your Clothes Online
- Ways to Make Money You May Not Have Heard of
- 5 Legit Work At Home Jobs
- Home Businesses You Can Start On a Budget
- Make Money with Your Smart Phone
TAKE ACTION! Create a budget today using these steps. Implement these tips to create your budget, pay down your debt and stay on track with your finances.
Have questions? Comments? Leave them below!