Welcome to Day 2 of the free Master Your Money course!
As discussed yesterday, everyone needs a budget.
A budget can help you with a spending problem, paying off debt, reaching financial goals, and more. Budgeting can help you take control of your financial life, which can help reduce stress and let you reach your dreams.
Here is how you can create a budget.
Should a budget be electronic or on a piece of paper?
Everyone has a preference, so this depends on what will work best for you.
Pencil and paper can be great, but an electronic version (such as a spreadsheet, Mint, or Personal Capital) can help you easily make changes.
I suggest choosing whatever you are most comfortable with. It doesn’t matter how you keep your budget; it’s just important that you stick to it.
Click here to download and print a monthly budget worksheet that I created just for students of the Master Your Money course. Use this worksheet to create your monthly budget. The “Expected” column is what you budget to spend each month in that category. The “Actual” column is what you actually spent. Doing this will help you see what you need to work on.
Side note: I recommend you check out Personal Capital. Personal Capital is similar to Mint.com, but much better. Personal Capital allows you to aggregate your financial accounts to easily see your financial situation. You can connect accounts; such as, your mortgage, bank accounts, credit card accounts, investment accounts, retirement accounts, and more. And it’s FREE.
You MUST track your income and spending.
What you want is to create a realistic budget. To show you where your money is coming from and where it is going, you need to gather all of your receipts, bank and credit card transactions, and so on.
Or, you could even take it a step further by tracking everything for the next month or two, this way you know you’re not missing any expenses. This means recording every single transaction with a note that tells you exactly what you bought (if a receipt is not itemized). Then, at the end of the month, you can evaluate your spending.
After one month of closely tracking your spending, I’m sure you’ll be shocked by your results. This is the best way to create a realistic budget, as you will truly see where your money is going, and this will help show you how much should be dedicated towards each category in your budget.
Plus, the shock from seeing exactly where your money is going will encourage you to be wiser with your spending.
Budget category: Income.
For the income part of your budget, it can be from varying sources. You can include income from your day job, rental properties, side jobs, passive income sources, and so on.
One common mistake is that many don’t realize their income can drastically fluctuate from month to month, even when you work the same hours every month or if you are paid salary. Due to this, you will want to be mindful of whether you are paid twice a month, every two weeks, once a week, etc. The difference of when you are paid can change the amount you make each month. Budgeting with a fluctuating income can be difficult, and in a future blog post I will go over it in more detail.
Also, I don’t think bonuses should be included in a person’s budget. Including them in your budget is not usually the best thing to do unless you are 100% certain you are receiving the bonus. I have heard of far too many people who have counted on bonuses only to be let down when it was less than anticipated. Your budget should be realistic, not a fairytale.
Budget category: Expenses.
Have you ever truly totaled your expenses?
When making a budget, many people only estimate their expenses. However, you actually should be taking your realistic expenses and putting them in your budget as your estimations may be way off.
Here are expenses you may include in your budget:
- Home – House payment, rent, maintenance, utilities, insurance, property taxes, etc.
- Car – This includes all car expenses such as your monthly car payment, gas, maintenance, insurance, license plate fees, and so on.
- Television, cable, Netflix, Hulu, etc.
- Cell phone.
- Food – This includes all groceries, eating out, snacks, etc. Seriously, sit down one day and add up your food expenses for the month before.
- Entertainment – Entertainment can include many things, such as going to the movies, going out for drinks, concert tickets, sports, and so on.
- Charity – If you regularly donate to charity, then this should be an area you budget for.
- Savings funds – This can be for your retirement fund, wedding, travel, etc.
- Taxes – If you are self-employed, then taxes will make up a large part of your budget.
- Health insurance.
- Miscellaneous – Pet expenses, fees, childcare, school, gifts, etc.
Keep your loved ones involved when creating a budget.
Even if only one person manages the family’s finances, the other person in the relationship should, at least, have somewhat of a clue. Conducting regular family money meetings is crucial to having a successful budget and meeting financial goals.
A budget doesn’t work if the other person doesn’t even know it exists!
Make changes when/if needed.
I recommend going over your budget on a regular basis. This may mean once a week, once a month, or something else. Do what feels right for you and what you think your situation calls for.
Many things can change in your budget. Your income may change, your expenses may change, or your goals may change. When something changes, you should adjust your budget to reflect that.
You may have noticed a recurring theme in this budget post, that you should be realistic about everything. Be realistic about what you make, what you spend, and if things need to be changed.
Well, that's it for today. Tomorrow you will receive the next lesson that will help you learn how to stick to a budget. Stay tuned!
Michelle Schroeder-Gardner MakingSenseofCents.com
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