Budgeting might seem scary. Especially if you’re not good with numbers and calculations. Or you just want to keep getting your venti caramel macchiato every day and pretend like it didn’t cost a thing. What’s another $4.75 here and there? Well, when you do finally made up your mind that you want to save money (or at least just stop spending as much), it can be very daunting trying to figure out where to start. But it doesn’t have to be!
I firmly believe that you (yes you!) can own your budgeting. In fact, I think it’s quite important that you know exactly where your money is going each day, week, year. Budgeting not only keeps tracks of your money, but it keeps you on track, too. Because, let’s face it. We all have goals and dreams that require funding, and living paycheck to paycheck is not going to help you reach them.
Instead of being intimidated by budgeting, think of a budget as a tool. It can help you track your spending, which can then help you decrease spending and ultimately help you save the money you would have just normally spent. It’s a very simple concept, but it’s often ignored. Many people do not have a budget. And if they do, they don’t check it nearly enough for it to actually work.
In order for a budget to work, you need to take care of it. You need to check it every week (if not every day) to see how you’re tracking. And guess what? This should take only literal minutes of your time. That’s it!
So, when you’re ready to get your budgeting back on track, follow my fool-proof, non-scary method for creating an easy, usable budget:
Step 1. Determine your monthly take-home pay.
Depending on how often you get paid, calculate how much you expect to take home each month after taxes and 401k savings. For example, I get paid bi-weekly, so I take my total pay after taxes and pre-tax payments (healthcare, 401k, etc.) and divide it by 26. This amount is what I get paid after-taxes every other week. Next, I’ll multiply it by 2, since I usually get paid twice a month. You’ll notice this amount is less than what it would be if I had divided by 12, but that wouldn’t be an accurate depiction of my typical monthly pay. Instead, I’ll get two additional paychecks a year that I can deposit right into savings without even noticing it.
Knowing your typical take-home monthly pay is the first step to budgeting. This is the money you have complete and total control over.
Step 2. Determine your fixed and necessary living expenses.
These expenses are totally necessary in order to get by each month. Some of these expenses are even reoccurring, fixed amounts, like rent. Basically, everything in this category is something you need and can’t give up, but maybe can cut back on (I see you, groceries).
You won’t be able to save much from the items in this category in the short-term, but over time you might want to reevaluate.
Step 3. Determine your variable “extra” spending.
This is where you will be able to save in the short-term. All of these expenses are not necessary for getting by, but instead just an additional layer of where you spend your money. In other words, this category is full of stuff you like to spend your money on, but when you take a good hard look at these things, you could make some serious cuts. This category can include items such eating out, entertainment, and grooming.
In the short-term, you will be able to save extra money by giving yourself a monthly spending limit on these items. Over time, these savings will really add up.
Step 4. Find out how much room you have to save.
Did you leave any room to save? If not, revisit step 3. Even an extra $20 will make a difference. Once you have money to save, move it to your savings account right away (out of sight, out of mind).
The more you budget, the more you’ll realize how little you can actually live on and how much more you can save each day, week, year. Over time, this step will naturally move to the position it really belongs, which is #1. As the saying goes, pay yourself first.
Here’s a breakdown of how budgeting may look in the real world. Example 1 is a hypothetical first attempt at budgeting. Notice there is very little money left over for savings, but a ton of waste on extra spending.
Example 2 is a hypothetical revised attempt with the same take-home pay. Now, thanks to budgeting, this person is saving 12.5% of his or her take-home pay and still has enough money to spend on everything else. This is a great start for someone starting out, and over time, they may find they can save double that amount in a month.
The point of budgeting isn’t to restrict you, but to help you. See, not so scary!