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How to Make a Budget

If you’re looking to get control of your finances the first thing we need to do is make a budget.budget

If that word makes you squirm and you assume that a budget means not being able to have fun anymore, please know that I felt the same way too. I can assure you though, after 3 years of making a new budget for each and every month, I’ve found that living on a budget has not been restrictive, it has been freeing.

It gave us permission to spend what we could afford which means there is no more guilt coming home from a shopping trip because the purchases are planned and budgeted for.

 

Wait…Did you Say Monthly Budget??

You did read that right. Yes, my husband and I make a new budget for each and every month before the month begins and here’s why you should consider it too:

  1. Some months we have 4 paychecks and other months we have 5. We want to make the most of our income each and every month, so by setting up a monthly budget we can be sure to make the most from that “extra” paycheck
  2. You may not have the same expenses every month. Although many of your fixed expenses will occur every month, other bills might not be due every month. My water bill comes in the mail every 3 months and thankfully I don’t need to plan a birthday party for my children every month.

computer budget

How to Make a Budget 

  1. Start with your total income: At the top of your paper, you will write down all expected income for the coming month.
  2. Subtract your fixed expenses: The first group of expenses I take away are the fixed expenses that pertain to the four walls, the expenses that allow me to continue living where I live and get back and forth to work. These include Mortgage/Rent, Utilities, Transportation (loan payment if applicable and fuel), Groceries, Minimum Debt Payments, Clothing.
  3. Subtract your variable expenses: These are the expenses that can change from month to month or are considered the nice to haves. Think Magazine/Newspaper Subscriptions, Personal spending money, Dining out, or Entertainment.
  4. Find out what’s left: This is the moment of truth, it’s time to subtract your fixed and variable expenses from your total income. If you have money left over, this is the money that you can use to put towards paying down debt or set aside for long-term savings.If you have a negative balance, it’s time to look at ways to cut your spending (link to future blog) or increase your income (link to future blog).

balance income and expenses

Bringing it all together:

Now admittedly, I’m a pen and paper type of budgeter. You may feel more inclined to create a spreadsheet. Regardless of how you prefer to budget, the important thing is that you are taking control of your finances and telling your money where to go instead of wondering where it went.

If you are a paper and pencil type, this is my all-time favorite template to use. If you think a spreadsheet might be more your style, you can watch my husband and I give you a quick tutorial on how to set up a basic budget using Excel.

 

Your Turn!

  • Are you a paper and pencil type or a spreadsheet type?

Estimating Income

I often listen to the Dave Ramsey podcast where people will call in with their money questions. Most of the time he’ll ask the caller what their estimated income is, and I am amazed (and not in a good way) at the number of people who aren’t sure.

When setting up our monthly family budget, the very first information I enter is our expected income. From that number, I then know how much I have to cover our monthly expenses and how much we can save for the future.

money

Let’s look at the three things to consider when estimating what your monthly income is going to be.

  1. Hang on to Those Pay Stubs: If you are a salaried employee (like myself), estimating your monthly income is a matter of looking at what you get paid each pay period and multiplying that by the number of pay periods that month. If you don’t have your pay stubs, go online and see what was last deposited into your bank by your employer.
  2.  Estimate your Monthly Average: If you have a variable income (meaning it may not be the same each pay period), you are going to want to find out what has been your average income. Look over your bank statements for the last year and total up your income (you could also look at last year’s tax information to determine your yearly income). You’ll next want to take that total amount and divide by 12 to figure out what your average monthly income would be.

adding up money

If you are in a field that varies greatly depending on the season, take a look at what you made this month last year to help you determine what you might make this month.

3. Don’t Forget All Sources: Your income does not just include money earned through your job. Don’t forget any other source of income you might have. Other sources of income may include, but are not limited to:

  • Government benefits
  • Investment earnings (if you are not reinvesting)
  • Rental income
  • Child support / alimony
  • Even that tax refund you might be expecting.

If you are self-employed, you may also be interested in what it means to estimate your income in a worst case scenario .

Your Turn!

  • How do you approach the budgeting process?

 

Your Debt

If your financial goal this year is to get out of debt, you’ll first need to figure out what your debt is. We knew we were ready to face the music when we felt the weight of our debt. We knew it was probably going to be a lot, but soon found out that it was a lot plus another $10,000.

If you’re ready to rid the burden and weight that is debt, follow these simple steps to help you identify your debt and then we can start looking at ways to attack it.

calculate debt

 

How to Determine How Much you Owe 

Make a List of Everyone You Owe: Gather up your statements and print off a copy of your credit report. Listed on your credit report will be all companies that you have credit with and how much you owe as of the last time it was reported (this may not be updated every month, so it’s always good to check the latest balance on the statements or online).

It is a good idea to check it on an annual basis anyway to make sure that the information is up to date and there aren’t any errors or possible fraud. You can obtain a free credit report here .

credit report credit score

Find out Everything You Can About Your Debts: You’ll want to find out the following about each of your debts:

  • The total amount owed
  • The minimum payment for each of your debts
  • The interest rate
  • When each payment due (monthly, quarterly, annually)
  • If it is an installment loan, the date when that debt is scheduled to be paid off.

 

Assess Your Situation:  Although this may seem scary, remember that this is just the starting point and it’s only going to get better from here.

  • First, add up the total amount of debt you owe. This may number may seem scary and overwhelming, but remember it won’t be that number for long because we were going to be knocking it down.

buried under a pile of debt

  • Next, take the amount of all of your minimum payments and add them up. This the minimum amount of money that you owe on your debt every month. Again, this can be overwhelming depending on the amount of debt that you have, but those payments will seem more manageable once you start eliminating those bills.

 

The other thing I realized about myself when I added up all of the debt was the amount of money spent to keep up with the Jones’. None of our debt was the result of a medical or financial crisis. It was all just stuff, items purchased to impress. After reading this blog post though, I was happy to know I wasn’t alone.

Now that we have faced the music, let’s look at some different plans of attack and figure out which one will work for you. 

Your Turn! 

  • What would having no more debt payments mean to you?

Determining What You Actually Spend

In 2015, when my husband and I decided that enough was enough and we were ready to take control of our finances, one of our first steps was to determine what we were actually spending. I knew this was going to be scary. We had been spending more than we were earning and because of it, our debt had been increasing.”

What we didn’t know was where that money was going and how much we were actually spending. So it was time to do what I refer to as a “Spending Analysis”.

money leaving hand

 

I gathered up 6 months worth of bank, credit card, and line of credit statements, a few different colors of highlighters, a calculator, and a tall glass of wine and got to work.

How to do a Spending Analysis

  1. Pick Your Color: I first had to determine which highlighter color would represent a different category of my spending. For example, yellow was any food related purchases including dining out, groceries, and those quick trips to the store for a snack or coffee. Blue was designated for fuel purchases. Pink was clothing and kid related expenses (since most of the clothes purchased were for our growing girls), and green was for any miscellaneous purchases (a.k.a. Target, where you are never able to leave with just one thing).

highlight budget

 

  1.  Start Coloring: I carefully went through each statement, highlighting the purchases and debit transactions according to the categories that I had selected initially. As you go through, you may find that there are more categories than you anticipated in which case you add another highlighter or two.
  1. Time to Start Adding It Up: Once my statements were categorized, it was time to begin adding up all of the expenses. For this I would total up all of my food costs (yellow) and divide by that number by 6 (since I was looking at 6 months worth of statements) to determine what my monthly average was. I repeated this for all of my spending categories.

calculate expenses

 

  1. Letting Reality Sink In: When I sat back and stared at the numbers, I quickly realized where the leaks were. We were spending nearly $1000 a month on food for a family of four which seemed higher than it needed to be. More surprising (although not really if I was honest with myself), was the amount that was being spent at Target (darn you Target Dollar Spot!).

Determining where our money was going helped me to see just how much was being wasted by spending $10 here or $20 there. Although they those smaller purchases don’t feel like much at the time, when you add it all up and see in fact how much money is slipping through your fingers, it is an eye-opening experience.

money slipping through fingers

 

This whole process allowed me to see that we really needed to look for ways to cut our spending and consumption.

Your Turn!

  • What are some of your spending weaknesses?
  • What areas of your spending could you cut back on?

 

Setting Financial Goals and Knowing the Why

It’s a new year and almost half of all Americans use this as an opportunity to start fresh. Approximately 42% of  those Americans who made New Year’s Resolutions made a money related resolution, yet less than 10% of us will be able to say at the end of the year that we actually felt successful in achieving our goals.

money goals

 

When my husband and I first decided to get on a budget and pay off our debt we were facing close to $59,000 in consumer debt that consisted of 4 credit cards, 2 lines of credit, and a car loan. Our why? We were sick of feeling as if we were living paycheck to paycheck.

We were tired of seeing our hard earned money go right back out the door in payments. We were sick of juggling minimum payments and living with a feeling of financial stress.

That’s when we found our “why”, we realized this wasn’t the life we wanted and the money was holding us back.

Understanding your Why:

Maybe your why is also to pay off debt. Perhaps you would like to save up and pay cash for a vacation. Are you looking at creating a budget to feel more in control of your finances? Regardless of your reason, it’s important to understand why and keep the end goal and the feeling that will come from achieving your piggy bank and calculatorgoal in mind.

In order to achieve success with your financial goals, you also need to know your why. If you are just going to create a budget or set a goal to ma
ke better financial decisions because it seems like the adult thing to do, sticking with a budget is going to be pretty difficult.

Getting on a budget is going to mean making some sacrifices and changing the way you approach your finances. It’s important to have a deep understanding of why you are willing to make a change to the way you are currently handling your money.

Once you know your why, how can you make sure you don’t lose sight of it?  What are those 10% of people probably doing to ensure their success? They are creating explicitly stated S.M.A.R.T goals and they have a deep understanding of why they are trying to attain that goal in the first place.

Setting a S.M.A.R.T. Goal:

A S.M.A.R.T. goal takes a general goal,makes it more specific, and increases your chances of successfully achieving it.

For example, a general goal might be “I’m going to pay off my credit cards”. An example of a S.M.A.R.T. goal is “I’m going to pay off $16,000 in credit card debt by December 31st, 2017 by making monthly payments of $1,334.00 per month.” Notice the diffe
rence? The first is a great goal to have, but is lacking in specifics. The S.M.A.R.T. goal is much more specific and includes an action plan.SMART Goal

So What Makes a S.M.A.R.T. Goal? 

  • S = Specific (What are your trying to accomplish?)
  • M = Measurable (Can you track your progress?)
  • A = Attainable (Have you planned your steps wisely to ensure success?)
  • R = Realistic (Is this a goal that you are motivated to achieve?)
  • T = Timely (Have you set a date that you would like to achieve the goal by?)

Be sure to check out Ryan’s post about how visualizing his goals helps to keep him motivated.

Your Turn!

  • What is your budgeting why?
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