Welcome back to our newest series: Twelve Months To Financial Fitness from our partners at BALANCE. In case you missed it, over the next year, we will provide you with personal challenges to help you on your way to a financially fit new year. Each month we will feature a new topic and challenge. Last month we analyzed spending and set goals to cut unnecessary expenses. If you missed it, you can always go back and start in January. This series can be found on our website, started at any time, and can even be repeated!
For February we are focusing on how to build a budget and stick to it. Most people know they need a budget. Maybe you have one, but you haven’t thought about it in a while, or you’re not sure if you are staying within your budget. This month we are taking away all the guesswork and walking you through your brand new budget.
Setting a budget is more than just a spreadsheet. It is a commitment or contract you make with yourself to only spend what you need to when you need to. It’s also a promise to yourself to optimize that budget to make it work for you, to provide you with the ability to do the things you want to do and the peace of mind to enjoy it. There are many budgeting apps out there that can automate some of this, as well as online banking tools utilized; however, the algorithms don’t always catch every bill correctly or help you keep down your discretionary spending. Our first and best tip is to get out a piece of paper or open a spreadsheet and do the manual work. You can then add your budget into those apps to help you stay on track.
There are different ways to build a budget, but below is our budgeting checklist:
1. Put together all your sources of income. This may include your main salary or wages, self-employment income, spousal support, dividends, government aid, and even bonuses. Categorize your income into income you can regularly depend on monthly (“fixed”), income that is fixed but occurs on another schedule other than monthly, and income that is not guaranteed or that varies in amount. Any income that is not guaranteed typically should not be relied upon for your regular expenses. We talk later about how to treat this income. The goal for this step is to know exactly when you will be paid throughout the month and year. If you are a visual person, you can even create a calendar so you can see when your money is expected.
2. After you have a clear picture of your income, it’s time to turn to your fixed expenses. These are expenses that do not normally change from month to month or that stay within an expected range but always occur on the same schedule. These fixed expenses include things like your rent or mortgage, car payments, consumer debt or student loan payments, utilities and media services. It can even include subscriptions or membership fees. If it is a regular and expected expense, it goes here. Once you have your list, add in payment dates. Next, categorize these expenses into necessary or essential (think utilities and rent) and discretionary (those expenses you can live without). This doesn’t mean you have to cut out discretionary spending (at least not yet), but at least you have a clear picture of what you have to spend and what you choose to spend.
3. Next, and much harder to pin down, is to figure out your variable spending. This would include spending on things such as entertainment, groceries, eating out, travel, clothing, etc. By pulling your financial records (which you hopefully did with us in last month’s challenge), you should have an idea of what you are spending each month and where.
4. Now it’s time to think about your saving habits. Are you saving enough and regularly? And where is this money going? In order to add savings to your budget, you need to know how much you need and want to be saving. That amount can vary by your savings goals, but in general, most individuals should be saving between 10%-30% of their income each month. Now let’s talk about how to do that because ultimately, budgeting is not about spending, it’s about freeing up money to save.
5. Now it’s time to do the math. Start by simply adding up your income and subtracting your expenses. Do you have enough income to meet your current expenses and save your goal amount? If you are like us, probably not. This is where the hard work comes in: setting a realistic budget and doing the work to make it happen by setting rules for your expenses. The first rule is to pay yourself first, meaning your savings should be the first non-negotiable expense in your budget, and then treating that money as unavailable. If you are not in a position to save the full amount of your savings goal that OK! But save something, and save it first.
6. After saving, figure out how much you need to cover your remaining necessary expenses (fixed and variable). Do you have enough? If not, where can you reduce spending? If are able to cover your necessary spending, turn to your discretionary spending. Where can you reduce or where do you have more room to indulge a little? Or maybe you want to go back and reallocate extra money into your savings?
7. If you have gotten this far and still don’t have enough income to meet your budget, don’t panic. Start making a plan to drastically downsize your spending or find ways to add in extra income. How you approach any deficits will depend on the size of that deficit.
8. We’re not done yet. Remember those extra income items that you may not always get or may vary in amount? Now is the time to figure out where to put those. Do you want to deposit them in savings or a retirement account, or maybe you can pay off a chunk of debt? Look at your overall financial help and figure out how those extra funds can help you. And don’t forget to reward yourself with some of it!
This month’s challenge is simple: make a budget! Then make a commitment to yourself to do a full self-check-in every month, or even every two weeks, for the rest of the year. You may not meet your budget every time, and that’s ok. Make adjustments and keep the promise you made to yourself… stick to the budget.