If you start to really think about how to make a budget you will be very, very thankful in the future.
When you break it down, a budget isn’t that hard to figure out. You look at what comes in and what goes out, and you want to make sure that what goes out is less than what comes in. But in order to do that, you’re going to have to clean up your finances.
How to make a budget in easy steps
To make a budget, you need to know how much money you make each month and how much you spend on essentials and other costs that change from month to month. Then, divide up your expenses and make changes to make sure you are living within your means and saving enough. At least 20% of your income should go into savings or investments.
Understanding your financial habits is important if you want to know why a certain amount comes out of your bank account every month. It will also help you reduce that amount over time so you have more money in your bank account at the end of the month. Sounds great/terrifying and like a lot of work. Cool, here’s how to get going:
Find out how much money you make each month.
This is the first step, the part about “what goes in.” Put together all of your paychecks and figure out your net income, which is how much money you have left over after taxes. This will tell you how much money you get to keep each month. If you work on your own, this part is a little harder. Gather up all of your invoices from the past year and add them up to find out how much you’ve been making on average each month. If you don’t think your contracts will change too much from month to month, you can use that estimate. You’ll also need to think about any taxes you might have to pay at the end of the year. Dividends you get from investments should also be taken into account.
Figure out how much you spend each month on things you need.
Now comes the part about “what comes out,” which is a lot less fun. Make a list of all of your monthly bills, including rent, any subscription services like Netflix or Spotify, water, electricity, gas, mortgage payments, car payments, your phone bill, health insurance, gym membership, etc. These costs are also called “fixed” costs because you have to pay for them every month and they tend to stay about the same.
Figure out your variable expenses
These are costs that aren’t always fixed and aren’t needed to keep the lights on and a roof over your head. These are also called “fun” expenses. They include money you spend on clothes, dinners out, happy hour drinks, trips, going to the theatre or movie, going to the grocery store, and so on. Depending on how you live, this one might be a little painful to face.
Add up all fixed and changing costs and compare them to your income.
This is where basic math comes in. If your spending is more than your income, or if you’re just about breaking even, you need a budget.
How to save money when you don’t have a lot of it
Reduce your variable expenses
Your variable costs will be the best and most obvious place to start. Here are some ways to save money on “fun” things:
- Instead of going out to eat, cook at home. This is better for your money and your health. Instead of getting greasy takeout on your way home from work or spending $16 on a salad for lunch, cook a big batch of something tasty so you always have a meal ready.
- Get a nice thermos and make your own coffee at home instead of buying expensive caramel-soy-mocha-whatever lattes. In the long run, you’ll save so much money.
- Buy your groceries at a cheaper supermarket or at a farmer’s market, where produce will be cheaper, fresher, and in season. There’s no better time than now to stop going to Whole Foods.
- Find other ways to hang out with your friends besides going to the bar. Throw a potluck, have friends over for a movie night, go to the park, check out a new neighbourhood… It will get you out of your usual Friday-Sunday routine, and you might even find a new favourite thing to do that won’t give you a hangover the next day.
- Look for sales. Do you really need that graphic t-shirt that costs $50, or can you wait until next month when it will be on sale for $15? Or maybe $12 will get you something much better. People like sales because they are fun.
Cut your subscriptions (or at least some of them)
Now it’s time to look at those expenses that don’t change. Your subscriptions are the best place to start. Do you really need Netflix, Hulu, HBO, Showtime, and whatever else is out there? Could you maybe cut it down to one and then use your ex-password girlfriend’s aunt’s to get into the other ones, like everyone else does? The same goes for Apple Music, Spotify, Tidal, etc. Just choose one and be done with it. Then you should also think carefully about your gym membership. How long has it been since you went to the gym? Sometime in 2016? Stop that right now. Instead of sending a monthly donation to Crunch, use the money you saved to buy some weights to use at home. Even if you don’t use them, it will still be better than sending a donation to Crunch every month.
Take into account the 50/30/20 rule
This is more like a suggestion than a rule. You should spend about half of your income on non-negotiable needs like rent, utilities, car payments, mortgages, etc. In a nutshell, most of your fixed costs. Your variable expenses take up 30% of your income. This is where you have the most room to save and cut costs. The last 20% should be used to make sure your finances are in good shape. This means paying off high-interest debt, saving more, and investing for the future. The percentages will change depending on how much money you make, how much extra money you need, and how much debt you have, but this is a good starting point.
Find a way to save money that works for you.
Now that you’ve cut back on some expenses that weren’t really necessary, it’s time to figure out what to do with the money you saved. The first thing you’ll need to do is find a savings account with a decent interest rate where you can put some of your money. This is an important first step if you haven’t been able to save money yet. Even though you won’t get a big return on your money like you would with an investment, it’s important to save so you can get through hard times or work toward a short-term goal (five years or less), like a house, a trip, or a wedding. Savings will also help you build up your money so you can start investing with confidence. So, let’s move on to the next point…
Start to invest
Once you have enough money saved to cover your living costs for two to three months, it’s time to start investing some of that “20 percent” of your income. This way, your money will work harder than if it were just sitting in a savings account, and you’ll also benefit from the magic of compound interest as your money builds up interest over time. Time is the key word here. Unlike money you save, money you invest isn’t meant to be easy to get at. The money you invest should go toward a long-term goal, like retirement or a college fund for a child who hasn’t even been born yet. If you want to start investing as soon as possible, look for accounts with low fees and few restrictions.
Another great way to invest money on a tight budget? Microinvesting. This means that instead of investing big amounts, you’re investing small amounts, often automatically, by linking your debit and credit cards to an account that rounds up purchases and invests the change. In this way, you can invest money you won’t even miss and save up to several hundred dollars a year just by going about your day. That’s as simple as it gets.
How to keep to a spending plan
Now that you’ve made a budget, you have to stick to it, which is the hard part. The key to sticking to a budget is the same as the key to sticking to a diet: it will only work if it fits with your way of life. That means that if you love going out to dinner or can’t live without Netflix, Spotify, and the like, it’s not realistic to cut these things out of your life and expect you to stick with it. So, the most important part of making a budget that will work for you is making sure it does. So, here are some suggestions for making the whole thing less painful for everyone:
If you pay for your daily expenses with cash, it will be much easier to keep track of how much money you’re spending than if you just mindlessly swipe a card. Take out a certain amount of cash once a week or so, and when that amount is gone, that’s it. It will also make you think a lot more about what you buy. If you only have $50 left in your wallet, do you really need to spend $45 on another satin bomber jacket with embroidery?
Pick one subscription and get rid of the others.
As we’ve already said, just get that Hulu password from your former coworker’s second cousin’s boyfriend, like everyone else.
Set up automatic deposits
By setting up automatic transfers from your checking account to your savings and investment accounts each month, you won’t even have to remember to put money aside. With a monthly automatic deposit, your savings will grow and you won’t have to worry about making a mistake.
Automatic saving is probably the most important part of a successful client’s plan for their money.
Start making a meal plan.
Write out a list before you go to the grocery store so you don’t just grab whatever you want and end up with 10 tubs of Nutella and one avocado. Even better, think about what you want to cook during the week so you have a general idea of what you’ll be making and can plan accordingly. When you have everything you need to make delicious, healthy meals at home, you won’t want to go out to eat nearly as much.
Don’t think about having a credit card.
A credit card is a great way to blow your budget. When you swipe a lot, it can be hard to remember that you’re still spending money… But it will hurt even more when you get your credit card bill the next month and see that you spent all your money at Seor Frogs. So don’t spend money you don’t have and don’t even bring your credit card.
Every month, look over your budget.
Things do happen. Unexpected costs come up, you can’t stop thinking about that dress you saw in the store the other day, and your best friend just got engaged and wants to have a bachelorette weekend in Cancn like, yesterday. If you go over your budget every month and make changes based on new events, new sources of income, and new expenses, your budget will stay manageable and fit with your life. In the end, that’s what will get you closer to a good budget.
The truth is that your budget will always change based on what’s going on in your life. Your budget should change as your plans change. You might want to start a family, change careers and move to a new city or country, or buy a house. No matter what, a budget is never something you can set and forget. Plan to look at it at least once a year.