Creating a budget and learning to stick to it month after month is important and crucial to your future financial success and independence.
The goal here is to have some money left over each month in order to save and eventually invest your money to grow wealth. Before you say, “I know how much I spend on utilities each month and therefore I don’t need a budget,” think again.
Without a budget, you might not know where your money is going. A budget helps you figure out if you are spending more or less; it allows you to make real changes for example cutting back on your spending; and it allows you to save up for buying a house or for investing. Moreover, a budget does not take that much time; it saves you time.
1. First, Figure Out How Much Money You Earn Each Month
You need to have an idea of how much money is coming in every month. So gather all of sources of income, i.e., your salary from full-time or part-time job and any other income, for example, money from investments, government benefits, etc…
2. Next, Figure Out How Much Money is Going Out
You need to gather all of your bills, for example you credit card statements, rent or home loan, car or public transport, phone, and electricity. Doing so helps you figure out where your money is going.
3. Third, Divide Your Monthly Expenses Into Three Categories: Fixed, Variable, and Voluntary.
Fixed expenses are expenses that stay the same every month, for example, your rent, car payment and maintenance, mortgage, insurance, property taxes, etc.
Variable expenses are expenses that are subject to change from month to month, such as groceries, credit cards, transportation, utilities, etc. The last category I’d call voluntary expenses. These include things such as entertainment, shopping, vacations, Christmas presents—things that you could do without.
If your total income exceeds your expenses, you’re off to a great start! Then the difference should go on savings. However, if your expenses exceed your income, then you will need to cut back on a few things like alcohol, cigarettes, buying clothes, eating out, etc.
4. Things to Do if Your Expenses Exceed Your Income:
a. Eliminate or Cut Back On Your Expenses
Fixed expenses may be a little bit harder to eliminate or reduce, but the first place to look at is your voluntary expenses. See if you can reduce or eliminate unnecessary things on that list. Ask yourself questions like, do I really need to take four or five vacations a year?
Do I need Cable when I am barely home? If you don’t want to get rid of these things, shop around for a better deal. For example, switch to a different, much cheaper cable services.
Next, look at your variable costs. See, for example, how many times a week you eat out and do it less often. A good way to cut on food expenses is to prepare and bring your own lunch to work.
Brew your coffee in the morning. A cup of coffee at Starbucks may seem nothing, but buying one every day adds up. Reduce your utility bills by shutting off lights and electrical appliances like TV, phone, laptops, and microwave when you leave the house. Doing these things can significantly lower your expenses.
b. Review and Update your Budget Regularly
Review and update your budget regularly, maybe every 2 to 5 months, to make sure it reflects your income, expenses, and what you want to accomplish. But the most important of all is to stick to it.
If you haven’t created a budget already, you should do so now.