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Why a budget is important
Before my budgeting days, my finances were all over the place. I had no idea how much money I was bringing in monthly, nor just how much was going out. Dollar bills were being tossed around that I should’ve clung to my chest all because it appeared that I had more money than I actually did.
Having a budget keeps you accountable for every dollar earned and spent. If you want to treat yo’ self, you’ll know just how much spending money you have to do it. That way, if you want to get that new shirt you’ve been eyeballing you won’t wake up the next day scratching your head when you see that your account balance is non-existent (been there, done that).
Creating a budget is important and all, but if you do not have a game plan and determination then it will be nothing more than just a piece of paper. Lately, I’ve been using Personal Finance to keep up with my spending and ensure that I’m staying on track. It’s completely free to use, and you can keep up with all of your accounts in one place even when you bank with multiple financial institutions. This includes mortgages, credit cards, auto loans, etc.
Related reading: How to Pay off Debt Faster With a Credit Card
Step 1) Determine your monthly income
To get started, you need to know how much you are bringing to the table each month. You don’t have to have the exact amount right down to the pennies, but it needs to be pretty close.
For your working wages, gather your pay stubs to determine your net pay. If your pay fluctuates, calculate the median amount. For example, if your paychecks range from $800 at the lowest then $880 at the highest, add the two together and divide by two ( the number of paychecks). Your monthly income should be written down at around $840.
Be sure to include all consistent sources of income including child support payments, social security, second jobs, etc.
Step 2) List all necessary expenses
Use the word ‘necessary’ at your discretion. These expenses should include your rent/mortgage, car payments, water bill, etc.
Sort through all of your reoccurring bills and calculate the total. For those bills that do not have a consistent amount owed, such as an electric bill, be sure to leave enough room just in case the amount is higher than normal. For example, if your electric bill is normally around $80 then budget around $110 to make room for those uh-oh months.
Step 3) Add in the amount you want to save monthly
Now that you have how much income you are bringing in monthly and the total amount your ‘must-have’ bills are costing you, it is time to determine how much you want to have saved. The famous money-man himself, Dave Ramsey, stresses the importance of having at least $1000 put back for a beginner emergency fund. An emergency fund is crucial to ensuring you don’t go back into depth or into a deeper amount. An emergency fund is exactly that…a fund for emergencies and emergencies only. Needing a fancy pair of eyeglasses may be a fashion emergency, but not one that should cause you to dip your hand into this fund. If Ol’ Faithful needs a new battery you will have the cash to cover the costs.
If you already have an amount saved for the unknown, consider challenging yourself to meet a ‘savings goal’. Personally, I like to have a little savings outside of my emergency fund just because. If you want to save $600 in 8 months then you know you need to put back $75 monthly.
By pulling out the amount you want to save early on in the budgeting process, you will be able to determine which non-necessity expenses can be cut/lowered in order to achieve your goals.
Step 4) List non-necessity expenses
A non-necessity expense is one that we pay for regularly but is not exactly needed. This includes cable, cell phones, club fees, etc.
Step 5) Sinking funds
A sinking fund is basically like a savings account, but you are saving for a particular expense. If you know you have a vacation coming up, you may set up a sinking fund in which you put back a certain amount of money over a period of time. Unlike an emergency fund or savings, you know exactly what the money is going for. This helps you to keep your paws off of your savings/emergency fund and to be prepared to make your purchase.
Step 6) Entertainment/pleasure
Lastly, set aside an amount specifically for entertainment. This includes your hair appointments, a little shopping, and all that jazz. This step should be done after all expenses and savings have been removed from your income, that way you know how much money you have in excess that can be used for some fun!
It’s easy to get carried away on entertainment, so I use the zero-dollar approach to keep me from overspending. This means that every dollar has an assigned job. In a sense, there is ‘no dollar left behind’. If you have $20 remaining after you’ve gone through all of the steps, go back and add to your categories until you’ve reached $0. Simple as that!
So many of us are led by our money, but a budget puts you back in control of your finances. As an added bonus, I’ve created a simple budget sheet to get you started! Grab it here!