Planning a trip? Hoping to buy a house? Or maybe you just have some debt that you would like to tackle once and for all? The solution to all of those, aside from winning the lottery, is building a budget. But where do you start? Do you know how to build a budget? We can help. That way you can make your money work for you. Let’s get started.
First, What is a Budget?
A budget is a plan for every single dollar that you have coming in each month. Sounds simple right? Regardless of how simple it seems, finances can feel overwhelming. But once you do it, it is your first step towards financial freedom and a life with less stress. Trust us. A budget will help you work toward your long-term goals. Having a budget forces you to map out your goals, save your money, track progress, and attain your goals. Also, having a handle on your finances will help you say no to splurging on that new fancy thing that you don’t need. Instead, you are one step closer to your goal. Instead of one step back.
Organize Your Financial Paperwork
Now that you know what a budget is, let’s get into how to build a budget. An easy way to start is to gather all of your financial statements together. The last 3 months of statements, if you have them so that you can get a true snapshot. Here are some of the things to find:
W-2s and paychecks
Credit card bills
Calculate Your After-Tax Income
Record all sources of income; make sure to record your net pay or take-home pay. Meaning what is deposited into your bank account once taxes, benefits, and any other contributions are deducted. You are only looking for regular sources of income.
Make sure that you include any regular monthly income from any side gigs that you have. However, if the side income is sporadic, you are going to want to exclude it. If you include it, it will mess up your budget. If you get paid a varying amount each month, then you are going to want to look at the past 3-6 months and calculate the average to include that amount in your monthly income.
Calculate Your Monthly Expenses
For this, you have to be very honest with yourself and truly dig into how much you spend each month and on what. Some items to think about and include:
Rent or mortgage payments
As you go through all of the monthly statements for the above, you should be able to start to get a clear picture of just how much money you have outgoing each month.
Calculate Your Fixed Expenses
Fixed expenses are the mandatory expenses that you pay the same amount for each month. Like your rent or mortgage, auto payment, internet, student loan, or child care. Even credit card payments can be included in this if you pay a set amount each month. Basically, you will want to include anything that you pay a set amount for each month.
If you plan to save a set amount each month to pay off a debt or plan for a big purchase, include that in your fixed expenses as well.
Calculate Your Variable Expenses
Variable expenses are expenses that vary month to month and can include:
Gasoline (especially this year)
Any utilities that aren’t fixed
Put it All Together
Some people use Excel or Google Sheets, or if you are old school, put pen to paper. Regardless, you are going to want to tally your monthly income and all of your monthly expenses. Look at the two columns. Hopefully, you have more income than expenses.
If you have more income than expenses, you have what is called a surplus. This means that you can afford to save more, afford a nice car, or you can step up how much you are paying toward your debt.
If you have more expenses than income, you have what is called a deficit. This is not good, but not the end of the world. It means that you need to look over your variable expenses and see what you can cut and where you can save money to get you into a surplus. Look at how much you spend on dining out or maybe look into buying your groceries in bulk. Potentially, you may need to look into getting a second job or a paying side gig. As a last resort, you can cut back on the amount that you are putting into savings.
Once you have a surplus, you are able to set some goals. The first goal that you should strive for is building up your savings in the event of an emergency. If something happens to your job or health, you want to make sure you don’t find yourself in a hole of debt. A good recommendation is to have 3-6 months of expenses saved. To calculate this, take your total monthly expenses and multiply that by 3 (or 6). It will take time, but once you are there you will be in a truly good spot with your finances. From there, you can set your next goal. Pay off a credit card? But a new car? A down payment on a new house?
Review and Adjust
Life happens, and things change. You could get a new job or a raise. As we have seen this year, groceries, gas, and other living expenses have gone way up. So your budget should be reviewed monthly to see if any adjustments need to be made.
But whatever you do, now that you know how to build a budget, just stick to it and you can truly make your money work for you!