This is hands down my favorite topic. One of the main reasons I started Cents Savvy LLC is because I've had so many people ask me about helping them create a budget because as we all know, a budget is the foundation of personal finance management. I LOVE managing my family's budget. I also love numbers (It's the C.P.A. in me!). You can not understand your next move financially without knowing where you currently stand. So let's get to it.
What is it?
A budget is a plan for your income and expenses that you can use as a guide for spending and saving.
Why do I have to budget?
I know, I know. The word budget in and of itself sounds so restricting, so mean, and like nails dragging down a chalkboard. "I want to live and spend how I want." "I work hard, I deserve to have whatever I want." While I totally agree with these statements, we have to be honest with ourselves and understand that "some restrictions may apply." Although many people already use a budget (great job!) to plan their spending, the majority of people also routinely spend more than they can afford. This can lead to inappropriate use of credit cards to make up for the lack of funds in your bank account. The key to spending within your means is to know your expenses and to spend less than you make. A good monthly budget can help ensure you pay your bills on time, have funds to cover unexpected emergencies, and reach your financial goals.
Ok Tiff, how do I create this budget?
I thought you'd never ask. Now I'm a little bit on the extreme end of budgeting, because I actually enjoy budgeting. I use Microsoft Excel and we have a very crazy & complex "Family Financial Plan"...as the hubby hates the word "budget." But to get started on your very own budget, here are the basics.
1) Add up your income - You first need to determine how much income you have. Make sure you include all sources of income such as salaries, interest, pension and any other income–including a spouse's income if you're married. If you get a salary, be sure to use your take-home pay rather than your gross pay.
2. Estimate Expenses - The best way to do this is to keep track of how much you spend for one month. You can look at a previous month's bank statement or download all transactions from your financial institution's website. Remember to include both fixed and flexible expenses. Fixed expenses are those that generally do not change from month to month, such as mortgage/rent, car payments, and insurance payments. Flexible expenses are those that do change from month to month, such as food or entertainment. I also like to build in transferring money to our savings account as an expense because it makes me think of it as a priority (Check out the "$20.17 Centsible Savings Challenge" to start saving today!).
3. Figure Out The Difference - Once you've totaled up your monthly income and your monthly expenses, subtract the expense total from the income total to get the difference. A positive number means that you're spending less than you earn--great. A negative number indicates that your expenses are greater than your income-whomp whomp. This means you will need to re-evaluate your expenses in order to begin living within, or better yet below your means.
Ta Daa!!–you've created a budget. The next step is to track your budget over time to make sure you're sticking to it. A budget means nothing if you don't monitor it, make updates as needed, and reconcile your actual spending to it. It can take revisiting your budget a few times to find the balance that works for you. I've been budgeting since I went away to college and over time, just as life has changed, so has my budget. From budgeting my monthly spending allowed in Forever 21 to now managing our weekly daycare expenses, whatever your life changes may be, continue to update and #ActYourWage!