We have all been there. Mentally accounting for how much money should be left in our bank account after bills and the purchases from the previous weekend. “I should have about $250 left in my account.” You log in to your banking app or website and there it is in all its glory. Your current balance shows $3.62. Lots of questions begin to flood your brain including how did this happen, how is my calculation so off, and most importantly, how am I going to make it to payday given what is left? The foundation to any personal financial management plan includes a personal budget. You cannot understand or execute on your next financial move without knowing where you currently stand. Let’s discuss the beauty of the personal budget.
What is it?
A budget is a plan for your income and expenses that you can use as a guide for spending and saving. 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 must be honest with ourselves and understand that "some restrictions may apply." Although many people already use a budget (great job!) to plan their spending, most 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.
The beauty (benefits) of budgeting
A good monthly budget can help ensure you pay your bills on time, have funds to cover unexpected emergencies, and reach your financial goals. With a budget, you have 100% control over your money. It allows you to live with far less stress without having to worry about when the next charge will hit your bank account. This is because you will know exactly what recurring expenses are being deducted every month. Another advantage of budgeting your money is helping you avoid spending on unnecessary services and products that are cutting into your financial goals. One of the largest expenses of people every month is money spent on food. Let’s say you buy lunch every day at work and you spend $5-$10 daily. That adds up to approximately $100-$200 per month for only one meal. Love to stop for your morning coffee? Tack on another $100-$150. These items add up quick and a budget, as painful as it can be, sheds light on your spending habits and gives you the ability to determine how you spend your money. Beauty is pain, right? Finally, the knowledge acquired with budgeting can make talking about finances much easier. Having a budget allows you to have cold hard facts when it comes to communicating. This makes having a calm conversation about money much easier. Not guaranteed to be a calm conversation, but much easier.
Create your budget
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 or sharing a household. 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. You should also build in transferring money to your savings account as an expense because it makes you think of it as a priority.
3. Calculate 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. This means you will need to re-evaluate your expenses in order to begin living within, or better yet below your means.
Monitor, monitor, monitor
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 several times to find a 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 on going out with my girlfriends each weekend, to now managing daycare and mortgage expenses, whatever your life changes may be, continue to update and #ActYourWage!