Where to Start When Creating a Budget
Why should you start a budget?
Setting up a budget is critical if you don’t want to spend your way into future financial problems. You’re committing yourself to managing your money instead of letting your money manage you. You may find it helpful to see how you’re spending right now. Keep a note pad for a week and write down all the money you spend, including the dollar for a pop and the change for a snack. Sit down and add it all up at the end of the week and the numbers may shock you. Without a plan the small one or two dollar expenses really add up. When you manage your money you know what you can afford before you spend and there’s no surprise’s at the end of the month.
OK, where do I start?
First you will need to decide how you want to begin tracking your budget. You can use a program, make your own spreadsheet, or just use a pencil and paper. How you decide to track your budget is up to you, the key is making it a habit. Set aside 15 minutes a day to work on your budget, you may find that you only need a few minutes some days and you need 30 minutes on others.
Once you’ve decided on a method it’s time to crunch some numbers. Record your take-home pay and all of your monthly expenses. If you don’t have receipts from the last month you can usually view past statements online at the service provider’s website or get your last checking account statement from your bank. Once you’ve done this you will have an idea of where you stand and how you want to proceed. A good budget reference is the percentage guideline.
35% Housing
15% Debt
15% Transportation
25% Other Living Expenses
10% Savings
So using this formula, if your take home monthly income was $1,000 you would spend your money accordingly:
$350 Housing
$150 Debt
$150 Transportation
$250 Other Living Expenses
$100 Savings
Now this formula may not work for you and that’s OK. If at all possible don’t overlook savings as a valuable monthly expense. It may seem like an easy way to put more spendable money in your pocket but that money can be a life saver later on. Unexpected vehicle repairs or health costs are inevitable and that money will be what may save you from disaster. Most importantly be realistic. If it is important to you to go to the movies twice a month, then budgeting $10 a month for entertainment may leave you feeling deprived rather than excited about your budget. If you are in a tough financial situation and must cut these expenses, then plan to put them back in when your debt begins to shrink or you get back on your feet. Knowing that you will be able to enjoy yourself again will keep you motivated to continue with your budget.
If you are going to be successful in your budget, you absolutely cannot spend more than you make. If you have outstanding debt, you must start paying it off and you cannot spend money you don’t have unless faced with an extreme health emergency.
What if I just can’t get the numbers to balance?
If you’ve done and redone your budget and things just don’t add up, then it’s time for some radical thinking. Here are some likely culprits:
· Housing: This is this single biggest expense you face, making cuts here can have a major impact. Consider looking for a cheaper place, getting a roommate, or renting a room for a while. As a last resort maybe you can move back in with your parents. Remember that it will only be temporary until you get some other expenses paid down.
· Transportation: If you have a car loan, you may already be over budget in this category. Before buying a car, remember the expenses that come with it. Check the insurance rates and reliability prior to buying. If at all possible pay cash, even if you have to take out a personal loan or borrow from family, you will save money if you don’t have to keep full coverage insurance on the vehicle. If you bought more car than you can afford, consider selling and buying something cheaper, or opting for public transportation for a while.
· Food: Basic groceries should cost a single person around $175 per month. You’ll spend a lot more if you eat out frequently or buy lots of frozen dinners and gourmet stuff. Cut food costs by taking a lunch with you and shopping the sales at the grocery stores.
· Utilities: A cell phone, large long distance bill, or a need to keep the house at 80 degrees can all put you over budget here. If you must have a cell phone consider getting rid of the land line or at least the long distance, as most cell phone plans include long distance. Consider wearing a sweater and keeping the house a little cooler, and if you don’t have a digital thermostat get one and program it to automatically lower the temperature at night and when you’re at work. They cost around $30 and easily pay for themselves in the first month.
· Personal: Just about everything in this category represents a want rather than a need. Spend less cash, find a cheaper haircut, buy clothes from a thrift store for a while, and disconnect the cable or at least switch to basic. It may be hard for you to accept making changes in this area but cutting in this area can be one of the simplest ways to free up some extra money.
· Savings: You may have to temporarily trim this area to pay off some debt, but do not cut it for anything else. The value of having a savings will become apparent one day and it’s not worth losing just so you can have a nicer car.
· Debt: If you’re a college graduate you’ve most likely got $20,000 in student loans and 2,000 in credit card debt. Just making minimum payments can put you over budget.
There are several steps you can take to keep these debts from pushing you over the edge. Consider a debt consolidation loan, or talk to your lender about interest only or income-sensitive plans. If you’re really hard up or unemployed you can ask for a deferrals or forbearance, but remember that interest will usually continue to accrue even if you don’t pay. That’s why it’s best to pay at least something each month.
Credit cards are one debt category where you absolutely must try and pay more than the minimum, otherwise interest and fees will pile up and you may never get out of debt. Consider taking money from savings and trimming every other category to get credit card balances paid off in a hurry.
If you’re still having trouble, consider contacting a local Consumer credit Counseling Service. Most of these companies work with lenders and offer low cost budget classes as well as repayment plans.
Otherwise, congratulations! The steps you have already taken will provide you with an invaluable blueprint toward your future goals. Remember responsible planning takes commitment, and although there will inevitable stumbles along your journey, continuing to adjust and persevere will have a payoff that is most certainly worth it.
