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So you want to start a budget.
Excellent choice! Budgeting has the power to change lives, and I’m excited to see you’re ready to change yours for the better.
But first, it’s important to know a few things going in:
- Budgeting will be hard–in the beginning.
It’s not easy to look at all the bills, crunch numbers, and try to tell your money where to go. But the more and more you do it (no, it’s not a “set it and forget it” kind of deal), the easier it will become.
- You won’t get it right the first time.
I don’t think there’s a single person on this planet that completely stuck to their budget the first time. Most of the time, people either under or over-estimate their spending when it comes time to make a budget. So don’t be surprised when you’ve gone way over (or under) the dollar amount you set for a certain category.
- It may take a while to get used to (and stick to.)
Budgeting is a skill that you have to practice. It takes most people at least a couple months to really get the hang of things and start changing their habits.
Now, on to the steps…
Step #1: Add up All Your Income
I want you to start by adding up all the income you typically bring in in a month. It’s easiest to go by take-home pay. Think of all your income sources such as:
- Your paycheck(s) at work
- Your husband’s paycheck(s)
- SSI benefits
- Child support/alimony
- Income from a side business (direct sales, etc.)
- Income from selling things (an eBay business, etc.)
- Babysitting/child care
- Housecleaning/other misc. services
If there’s anything I missed, add it in here. If it’s money you typically receive and rely on each month, include it with your income.
Step #2: Make a List of All Your Bills
Grab a piece of notebook paper and write down every bill you can think of that you typically pay each month. This list will probably include:
- Insurance (car, health, life, etc.)
- Cell phone
- TV/streaming services
- Credit card payments
- Auto loan payments
If you pay your bills electronically or by check, you can take a look at last month’s bank statement to see all of the bills you paid.
Right beside each of those bills, I want you to write down how much you have to pay this month (or next month if you are budgeting a month ahead.) For some of these bills, you may already know the exact amount. For some bills you may have to estimate how much they will be, like the electric and water bills. If that’s the case, look back at how much you have been paying over the last few months and write down the average. Try to plan ahead; if summer is coming up and you know your electric bill will be higher next month, add in a little extra wiggle room for that bill just in case.
Step #3: Assign an Amount to Your Variable Expenses
Variable expenses include things like food, fuel for the car, clothing, etc. When you’re just getting started, don’t go too crazy and try to budget for twenty different variable categories. I like to keep things simple and budget an amount for groceries, fuel, and entertainment (which includes dining out, going to the movies, etc.)
To figure out how much to budget, again look back at how much you’ve typically been spending in these categories. If you feel like those numbers are too high, try shaving just a little bit off at a time.
For example, if you notice you typically spend $150 a week on groceries, budget for $130 a week ($520 a month.) You can work your way down to a number you’re happy with, but I don’t want you to start too low and get discouraged when you over-spend and blow your budget.
Step #4: Determine Your Giving and Saving
An important part of each budget is deciding how much of your income you are going to give and how much you are going to save.
If you are a Christian, you probably know the concept of tithing (giving ten percent of your income back to God through the church.) Depending on your situation, ten percent may seem like a lot of money. And truthfully, it is.
But whether you are religious or not, I believe giving is an important part of everyone’s lives. Take some time to really think about and decide how much you want to give every month. And giving doesn’t have to be all monetary. Think of ways you can donate your time or belongings to others in need.
On the other hand, you also need to be saving some of your income each month. Just like giving, I believe ten percent can be a good starting point, but shoot for more if you can.
Step #5: Decide on Your Financial Goals & Dreams
Now I want you to take a few minutes to have a little brainstorming session. Ask yourself:
- Where do I want to be this time next year?
- What is one thing I’ve always wanted to do, but felt held back because it’s too expensive?
- What would an extra $500 a month look like to my family? An extra $1,000?
After you’ve got your answers, I want you to think about all your monthly debt payments. If you’ve never added up how much you’re paying in minimum payments each month, now would be a good time to do that.
If you currently have any debt, I want you to make up your mind to get rid of it. Stop letting debt keep you from having the freedom you truly want!
If you don’t have any debt, I seriously applaud you! What other financial goals do you have? Is it getting half a year of expenses in an emergency fund? Buying a new car in cash? Taking your entire family on a dream vacation?
Dream big and decide on your financial goals and dreams. We’ll assign a number to them soon.
Step #6: Subtract Your Bills, Variable Expenses, and Giving & Saving Amounts From Your Income
Next, add up the total of your monthly bills and monthly variables from steps two and three. Then, subtract those totals from your monthly income. Next, subtract the amount you designated for giving and saving. It will look something like this:
$4,000 (income) – $2,000 (bills) – $1,000 (variable expenses) – $500 giving & saving = $500
Great job so far! Now let’s decide what to do with that extra money leftover. This is where those financial goals and dreams come into place.
If your big goal right now is to get out of debt, I want you to throw any leftover money at your debt pile. So in the example above, you would be paying $500 extra towards debt payments. If you’re on a different financial goal or dream right now, budget that extra money towards that goal. Whatever you do, don’t just let that extra money hang out in your checking account. It will eventually fade away by random purchases here and there.
Step #7: Celebrate!
There you have it! Your first monthly budget. Hopefully it wasn’t quite as challenging or intimidating as you may have imagined.
Now the hard part is over (for the most part.) The second part of the budgeting challenge comes to actually sticking to the numbers you just set. The easiest way to do this is by keeping your motivation in mind.
What made you decide to budget in the first place? What dreams did you come up with in your brainstorming session? Remember that you get closer to your dreams every time you choose to follow your budget. This will help you stick with it until budgeting becomes the new normal.
From here on out, you’ll be able to use this month’s budget as a template for the next month. Every month will come with different costs (you may have a lot of birthdays to buy for one month, your electric bill will be higher in the summer than in the fall, and so on and so on) but now you have a good starting point to go off of. You’ll have to do a little adjusting every month, so don’t be afraid to change the numbers around. Stick with it for the long haul, and you’ll see how budgeting truly changes your life!
By following the seven steps above, you can be confident in creating a budget that works for you. You probably have more questions, such as “What do I do when I go over-budget?” or “What if I forgot to budget for something?” Don’t worry, all those questions will be addressed in separate posts. For now, I just want you to focus on getting the basics done and creating your first budget.
Now go forth and rock your budget!