Even if you don't share my enthusiasm, making a budget is the number one way to get your finances in order! But if you have never done it before, it can feel limiting and it can be hard to know where to start. So what do you do?
Track your spending
Trust me, your money isn't going where you think it's going. It will help you in budgeting if you have a better idea of where your money is going. I like mint.com (it's free!) for tracking spending but there are other applications like You Need a Budget (YNAB) or you can go old school and use a spreadsheet.
Track your spending
Trust me, your money isn't going where you think it's going. It will help you in budgeting if you have a better idea of where your money is going. I like mint.com (it's free!) for tracking spending but there are other applications like You Need a Budget (YNAB) or you can go old school and use a spreadsheet.
Fixed expenses
To build your budget you need to start with your fixed expenses. These are the items that you pay every month and they are always the same. These will be be big ticket items like mortgage/rent, car payment if you have one, health/car insurance and any debt payments you need to make.
Variable neccessities
This area is a tricky one. These are things you need but they aren't the same every month like utilities, gas and groceries.
For utilities I would estimate on the high end of where you normally are. If you haven't tracked your spending before you can look on your previous bills or online accounts how much you normally pay for water, electric and natural gas.
Groceries can also be hard because you might not realize how much you are spending. This is also a good area where you can usually save more just by being aware of how much you are spending.
Savings
Did you notice that savings comes before extras and luxuries? That's intentional!
If you don't have a separate savings account, you need to open one right away. How much to save can be hard, if you haven't been saving regularly one approach is to start by saving $20/week or you can go with the conventional wisdom of saving 15% of your take home pay.
Personally, I try to save as much as possible (currently around 35%) either for short-term or long-term goals so I wouldn't cap it, but definitely build in saving to your budget.
You should also consider long-term and short-term savings. Long-term are things like retirement and investment savings, where you don't plan to spend the money in the foreseeable future. Short-term savings are things like vacation savings or money for an upcoming car purchase. In other words, money you aren't spending now but are planning to spend in the foreseeable future.
Many people "save" but it's really delayed spending for their upcoming vacation or purchase, it's important to make sure you also have long-term savings.
You should also consider long-term and short-term savings. Long-term are things like retirement and investment savings, where you don't plan to spend the money in the foreseeable future. Short-term savings are things like vacation savings or money for an upcoming car purchase. In other words, money you aren't spending now but are planning to spend in the foreseeable future.
Many people "save" but it's really delayed spending for their upcoming vacation or purchase, it's important to make sure you also have long-term savings.
Extras
Now what do you have left over? This category would include entertainment like cable or Netflix, restaurant spending, hobbies and anything else you want to buy or do but which isn't necessary for your life. You might think it's necessary but you have to be honest with yourself that it's really an extra.
I would also argue that for most of us, clothing falls into this category. Most people, myself definitely included, don't buy new clothes because we need it but because we want something new or different. Do I need new fall boots? No I have 2-3 pair already but I want a new pair each fall. If there is room for these extras in the budget you can have them otherwise you might have to give some of them up. It's really about choosing what is really important to you.
Now, how do you know if you are staying on budget? This is where tracking your spending comes back in. As I said there are many ways to track but the important thing is to then follow the budget.
When you first start, you might realize that you need more money for clothes and less for entertainment than you originally thought. It's ok to make adjustments, but keep in mind if one category goes up, another category goes down. Just remember not to lose sight of why you are budgeting in the first place - maybe it's to save for a down-payment, build an emergency fund or just to get a handle on your finances.
Budgeting is a good start to getting control of your finances but if you are overspending you will also need to look at where to cut, check out my post on reasons you're poor to get some ideas on reductions.
I would also argue that for most of us, clothing falls into this category. Most people, myself definitely included, don't buy new clothes because we need it but because we want something new or different. Do I need new fall boots? No I have 2-3 pair already but I want a new pair each fall. If there is room for these extras in the budget you can have them otherwise you might have to give some of them up. It's really about choosing what is really important to you.
Now, how do you know if you are staying on budget? This is where tracking your spending comes back in. As I said there are many ways to track but the important thing is to then follow the budget.
When you first start, you might realize that you need more money for clothes and less for entertainment than you originally thought. It's ok to make adjustments, but keep in mind if one category goes up, another category goes down. Just remember not to lose sight of why you are budgeting in the first place - maybe it's to save for a down-payment, build an emergency fund or just to get a handle on your finances.
Budgeting is a good start to getting control of your finances but if you are overspending you will also need to look at where to cut, check out my post on reasons you're poor to get some ideas on reductions.
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