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If you’re like a lot of people, the thought of writing a budget immediately makes your skin crawl. But budgeting is one of the most important tools for keeping every other area of your life under control. If your finances are a mess, it’s likely the rest of your life will be a little messy too.
Many people instantly tune out or get defensive when I start talking about budgets. The biggest excuse I hear for not having a budget is that it’s too restricting. The second biggest excuse is not having enough money or having an irregular income. Let me be straight with you. Neither of those is a good excuse.
Budgeting is the exact opposite of restricting! When you tell your money where to go, you are in control, not the other way around. If you want to budget $100 for a mani/pedi, go for it! You get to decide how to spend your money! What could be more freeing than that?
And if you tell me there’s not enough money to budget or that your income is irregular, I will tell you that’s even more reason to have a budget!! Seriously, it can be incredibly stressful not knowing when or how much your next paycheck will be when you know you have bills coming up and you need to eat. But if you use a budget, you’ll be fine! Why? Because you planned ahead and covered all of your expenses – you may even have a little left over.
Before you start budgeting all of your income for an extravagant getaway to the Bahamas, though, there are a few basics you need to know first.
Step 1: Write down all of your expenses
Grab a sheet of paper and a pencil and start listing out every bill and expense that you pay each month. Include the following:
- Transportation (gas or commuting costs)
- Debt Payments
- Other monthly expenses
Step 2: Add irregular expenses to your list
Now add all the expenses you don’t pay every month. For a lot of people this may include:
- Insurance (home, life, car, etc.)
- License & Taxes
This is an important step that a lot of people skip. You think you’ll just figure it out when the bill comes. The trouble with that is about every three or six months (or however often these bills are due) you get stuck with a bill for a few hundred dollars and you’re scrambling to come up with the money to cover it.
Here’s a scenario for you:
Let’s say you earn $1,000 a month. After all of your monthly expenses, you have $100 left. If you’re not budgeting for your irregular expenses, you think you have $100 to spend however you want – and so you do. In fact, you do that every month for five months.
But then your insurance bill comes and it’s $300. Now you’re in trouble because you still only make $1,000 a month and only have $100 left after your monthly expenses. You’re short $200.
Let’s say you thought ahead, though, and budgeted $60 a month for those five months. You now have the $300 you need to pay your insurance, and you still have a little money left over!
Having a little less spending money each month is a fair trade-off for the peace of mind you will have knowing that you’ve covered all of your bills, even the ones that don’t come every month.
Step 3: Write down your income
Include all sources of income, no matter how small. Every little bit helps. The reason I do this step AFTER writing down all of my expected expenses is that I like to get all my expenses down on paper first without feeling limited by my income. If we need to cut some expenses afterward, we can do that in the next step.
Step 4: Subtract the total of all expenses from the total of all income.
If you are left with a positive number then you’re doing great! That means you’ve covered all of your expenses and you have a little left over at the end. I recommend setting aside some savings, but feel free to treat yourself sometimes too!
If, however, you ended with a negative number, start by taking a deep breath. It will be ok. The next thing you need to do is go over your expenses and make as many cuts as you possibly can.
Remember that when you owe more than you have earned, it’s time to make some sacrifices.
Here are some suggestions:
- Get rid of any unnecessary expenses. This may include cable, non-essential phone lines (does your 8-year-old really NEED a cell phone?), maybe even internet – unless it is essential for your job.
- Cut back as much as possible on necessary expenses. Try cutting your grocery and gas bills by a few dollars every week to start. You can also call your utility companies and ask about any promotions or alternate payment options they may have. And be sure you’re using your utilities effectively by turning off lights, unplugging unused electronics and turning your thermostat down
- Look for additional sources of income. I know this isn’t usually ideal, but the goal is to get you back on track in the short-term so that you can start winning with money in the long-term.
Congratulations, you’ve written your budget! Now comes the fun part, following it and finally starting to take control of your finances!
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Comment and let me know how you feel about budgeting. What’s the hardest part for you?