Updated: Aug 28, 2020
A majority of working Americans find themselves living paycheck-to-paycheck and don’t see a way out. It doesn’t need to be that way!
As a Financial Coach, the very first thing I do with my clients is walk through the basics of budgeting. A budget you follow is the key to financial freedom.
What is a budget?
A budget is just a plan for how you spend your money. Usually budgets are monthly, as many bills are monthly.
We recommend a zero-based budget, which means that your income minus your expenses equals zero. Expenses include things like retirement savings, emergency fund savings, and anything else you put in there. We just want to give every dollar a direction, so that no unaccounted for spending slips through the cracks and onto an ever-increasing credit card statement.
First time budgets are usually simple. As you get used to budgeting, they get a little more detailed.
Why do I need a budget?
Budgets are how you figure out what you want to do with your money. They’re a great way to communicate between spouses as well.
Living without a budget might seem like true freedom. Remember, your budget is your budget. You are still free to spend your money however you’d like. Having a budget is true freedom to do what you want with your money, because you’re keeping track of all of the money and won’t be surprised by a large bill that crept up on you later.
Everyone needs a budget. Even millionaires need budgets or they don’t stay millionaires for very long!
How do I get started budgeting?
Budgeting is pretty simple.
Add up your total monthly income and write it down. Write down your total take-home pay between you and your spouse. That’s after-tax income. Include everything you earn in a month, even side job income.
List all of your monthly expenses. These include your monthly bills (housing, utilities, etc), quarterly or irregular bills (property taxes, Christmas), and anything else you usually buy (groceries, gas,eating out, clothing). I like to categorize them into essential and discretionary spending. Essential are things that I need to live and survive. Discretionary spending is optional or nice-to-have spending. Another way to put that is Need vs. Want.
Start with your income and subtract your monthly expenses from that income. I do it in two stages. I first subtract my essential or Need expenses. After I get that total, I then subtract my discretionary or Want expenses. That method gives me an idea of how much money I could have and then how much money I do have at the end of the month if I change no expenses at all.
If you have money left over, assign it a name. We’re aiming for a zero-based budget, so put a name to those dollars. I assign it first to my emergency fund, if it’s not up to the right level, then retirement (aiming for 15% of income), then college savings (for my kids), then paying down the mortgage early. Of course, those are in order of priority and the extra doesn’t always make it to through the stages each month. We have some variable income. Sometimes we don’t get to budget for all our discretionary or Want expenses.
Plan your month, track your spending, and stop spending when you’re at your limit. This is easier said than done. I’ve been known to carry a notebook with me to the grocery store to stay within our grocery budget. I also like to use online spending trackers to help facilitate communication across the family, so someone doesn’t go out and blow up a budget category with some unplanned spending.
There are a few tricks to creating a budget, tracking spending, then staying within budget. For instance, keeping a stocked pantry will help you make some “too much month for my money” meals. A few weeks will get you a stocked pantry to source from (and then keep stocked) for any sort of pandemonium that comes up.
If you find your expenses are more than your income, you have two options. You can either cut your expenses or increase your income or both. The goal here is to get out of debt in a safe way, build an emergency fund (3-6 months of expenses), save for retirement, kid’s education, and pay off the mortgage early. Can you imagine what it would feel like to have absolutely no debt?
For me, it feels like a beautiful beach vacation. Rays of sun with no debt to follow me home!
Are you finding budgeting difficult or have too much month at the end of your money? Maybe expenses are getting overwhelming or you can’t see a way out? Reach out to Saver Street Financial Coaching. We’re here to help you win with money and build wealth. Find the path to financial freedom with Saver Street.