For the “Tip of The Week” this week we’re going to break down budgeting into 3 easy to follow to steps. A lot of times when it comes to creating a budget for your personal of family finances you can easily get overwhelmed and quit before you’ve even started. As you start planning out your budget it’s important to understand that getting accustomed to using a budget and getting out of debt will not be an overnight process. Budgets are often the most effective when you make small and simple changes and apply them over a long amount of time. As you apply these three simple steps you’ll be amazed at what they can add up to over time.
Step 1: Evaluate Current Spending- As we’ve mentioned in previous budgeting posts the first and most important step in starting your budget is knowing where your finances currently stand. As you begin your budget we recommend sitting down and taking a look at ALL of your expenses. Oftentimes when we people start outlining their expenses there are several that will go overlooked but it’s important to account for not only your normal monthly expenses but also your expenses that come each year like property taxes, some life insurance plans etc.. By outlining all of your expenses you’ll have a starting point to work from.
Common Expenses Include:
- Rent/Mortgage Payments
- Car Payment
- Average Monthly Fuel Expenses
- Average Monthly Vehicle Maintenance Expenses (Oil Change, Transmission Services, etc..)
- Planned Family Vacations (Divide By 12 To Know The Monthly Amount)
- Home, Life, Auto Insurance
- Weekly Groceries
- Entertainment Expenses (Cable, Internet, Movies, Restaurant Expenses)
- Annual Property Taxes (Divide By 12 To Know The Monthly Amount)
- Gym Memberships
- Movie Clubs
- XM Radio, Sirius Radio, Spotify monthly memberships
Step 2: Set Spending Goals- Once you have an idea of your monthly expenses it’s time to set some goals. Before you can set some goals you need to first compare your expenses to your income. If you find that you’re spending more than you make each year your goal should be to cut your expenses so that you do not have to spend more than you make each month. Some of the common expenses that you can cut include cable, internet, entertainment/out to eat, and other monthly memberships. When people finally sit down and take a look at their expenses they begin to realize how they’ve let all of their different monthly memberships add up to the point that they are suffocating, this will be a good time to simplify your monthly spending. Once you get your expenses in order it’s time to set a goal to start saving, your first goal should be to start saving at least 10% of your pay each month, once you’ve accomplished that you should work towards saving 20% each month until you’ve built up a reserve that could cover 6 months of your monthly expenses.
Step 3: Repeat Monthly- As we mentioned at the beginning of this post this is an ongoing project, don’t think of this as a one month goal. Once you’ve gotten comfortable with your budget keep working at it each month, continue to assess your expenses each month so that you can always be moving forward to your next set of goals. Once you’ve built up a savings, there are always more things that you can do whether it’s paying down credit card debt, paying off your car loans or even working towards paying down your mortgage early. As you work through this process it’s important to understand that everything isn’t going to go as planned, there will be months where you come up a bit short and you might need to put some unexpected bills on your credit card or take out a short term loan. If that happens don’t give up, keep working towards your goals.
Budgeting can be a lot of fun if you let it, there are a plethora of budgeting apps that you can use to make budgeting more fun or exciting. As you make your budget your focus it’s also important to remember that it’s ok to have fun every once in awhile, if you get too strict on your budget you’ll end up hating everything about your budget and giving up. If you have any questions on budgeting be sure to leave them in the comments section below or check out our other budgeting videos.