Creating and sticking to a budget is arguably the most important thing you can do to get your financial house in order. Whether we have large amounts of discretionary income or very small amounts available, knowing how much money you have and where it’s all going helps direct funds appropriately and can give you peace about your current financial situation. If it’s time to start a family budget, and you’re not sure how to start, here are some tips to help you on your way.
Start Simply. Tracking your budget doesn’t have to be complicated. Using a very basic spreadsheet, ledger, or even just a piece of paper will do the tick. You don’t need to create dozens of highly specific categories, just enough to cover each area of spending.
Write down everything you spend. Do this for a week or two, or even a month. It will give you an idea of where you are spending your money. You’ll be able to see how much you’re spending at the grocery store, gas station, and that yummy little deli just up the street from your office.
Create your budget. Follow these steps to create your written budget.
1. Calculate your monthly income – We’re looking for your after-tax amounts here. Include all sources of income, including your take-home pay from your job, side jobs, supplemental income, and tips. All of these combined represent your income.
2. Charitable giving – Many financial experts stress the importance of charitable giving, generally 10-percent of your income. This may be donated to your church or to a cause that is dear to your heart.
3. Pay yourself – Having a savings plan is important. Decide how much you want to set aside each month for short-term goals, like revamping your wardrobe or buying new tires; mid-term goals like a big vacation, a new car, or replacing the carpet; and long term goals like education and retirement. Make these savings a priority.
4. Total your fixed expenses – Fixed expenses are those that come around every month, including health and auto insurance, your rent or mortgage, groceries, and fuel. Some of these, like utilities may vary from month to month. In this case, budget for the highest month. Leftover funds can go to savings or discretionary spending.
5. Pay off debt – Your car loan, student loans, credit cards, and anything you owe money on other than your mortgage is listed here. Total all of your monthly payments, and add extra to pay toward the lowest balance each month to pay off debt faster.
6. Set aside discretionary funds – This money is used for personal care, entertainment, travel, gift giving, eating out, and anywhere else you spend money in a month. Looking back at the log you kept of your spending will help you come up with a realistic amount for this category.
7. Create an emergency fund – Life can be unpredictable, and sometimes unexpected financial situations happen. Rather than breaking out a credit card, it’s better to have emergency funds ready to go. Eventually, you’ll want 6-12 months of living expenses here, but start with about $1000 and increase it regularly.
Pay cash in person. When you pay cash for everything you buy in person, you are more aware of what you’re spending than if you just swipe your debit card. Putting the money allotted to each item, such as groceries, fuel, and entertainment into separate envelopes each payday keeps you from overspending in each category.
Make your budget work for you. If you set up a budget, and it simply isn’t working after a couple of months, adjust it until it’s something you can live with.