Now that the holidays are behind us and we’re looking starting a new year, it’s the perfect time to get serious about your finances. Let’s talk about how to create a budget.
How to make a budget you can actually stick with.
Creating (and most importantly, sticking to) a budget is one of the best ways to get on the right financial path. I hear all that time that creating a budget feels overwhelming, and that’s what prevents people from doing it. It’s not as hard as you think – you just have to get started!
How to Create a Budget
1. Get a ledger or create an Excel document.
Organization is key to starting a budget. If you don’t write down how much you plan to spend in each category, you will overspend. Some people prefer an old-fashioned accounting ledger, whereas others like to keep an Excel document. Either way is fine, but if you’re going digital, make sure you back up the file.
2. Write down your fixed expenses.
Include your monthly payments for mortgage/rent, car payment(s), utilities (more on that next), insurance, student loans, cable/internet provider, cell phone, child-care expenses and church pledges (if it applies). These are expenses you can count on every month and you need to know exactly how much they add up to.
I also like to use a free app, called Mint. You can download it for free and it will help you figure out your fixed expenses.
3. Figure out what you pay annually in utilities.
Experts recommend keeping your utility statements (natural gas, water/sewer, electricity, trash removal) for a year. Dig out the bills, if at you have them, or look back what you’ve paid each provider over the last year. Once you have the total, add 10%, and divide by 12. Now you know what you should budget for each month. The extra 10% will give you a cushion for really hot summers or really cold winters.
4. Add up all minimum payments for credit cards and medical bills.
It’s important think of credit card minimum payments as part of your fixed expenses. Add 10% again, if at all possible. Minimum payments often just cover interest, so budgeting extra to pay down the balance will help you get out of debt faster.
5. Write down liquid monthly expenses.
If you have a baby or toddler in diapers, think about how much you spend each month. What do you spend each week at the grocery? How about toilet paper, paper towels, and cleaning supplies for your house? Do you like to go out to breakfast on Saturdays? What’s the typical bill? If you have pets, how often do you buy food or cat litter? How often do you fill your gas tank? Estimate how much you spend each month on those items – they add up!
6. Now, think about longer-term expenses.
Who do you buy gifts for over the course of the year, and how much do you spend on each person? Look back at how much you spent for holiday gifts, as well. If you have pets, how much do you pay for their annual visits and vaccinations? What does it cost each year to renew your car registration and pay for regular oil changes? Add up those annual charges and divide by 12.
7. Start an emergency fund.
Setting aside even $100 a month helps toward those unforeseen expenses such as a major appliance breaking or needing to put new tires on the car. Make that part of your budget so you have at least some money available should you need it. You really want to have $1,000 in the fund, but for now focus on saving $50 to $100 a month.
8. Leave a budget for fun stuff.
From eating out for lunch, going to the movies, or quick trips for soda, you need to create a budget for fun stuff. If you allot the money to eat out, then you won’t feel “restricted” and blow your budget. If you are trying to get out of debt, then you need to allow for fun stuff. That way you are still getting out of debt, but still enjoying your life.
9. Break out your monthly expenses based upon your pay periods.
If you’re paid monthly, you’re all set. Twice a month, divide your monthly total by two. If you’re paid weekly, divide by 4 (even though that doesn’t work out perfectly, it will be easier). Now you know how much you need to set aside each pay period for your budget.
Stick with your budget
The first year on a new budget is hard. You have to adjust to new spending habits and get used to saying “no” if you don’t have the money for another meal out. That said, you can’t imagine the sense of relief and satisfaction you will feel when the car registration renewal comes due and the money is sitting there, or next year at Christmas when you have the money to purchase your gifts without going into debt! You can do it!
You want to manage your money – don’t let your money manage you.