The new year is when most people sit down to re-evaluate their finances and set goals for the coming year. I laid out my goals in my last post. However making goals is only the start. The next step is to come up with a game plan on how you’re going to meet those goals. If you’re looking to stop living paycheck to paycheck, or if your goal is to put more money into savings this year. Then an effective budget is the tool you’re going to need.
I know, I know budgets aren’t very exciting or sexy to talk about, but they’re a powerful tool that can be the difference between taking the vacation you want to take, and wondering how you ran up a balance on your credit cards again.
You’ve probably heard about budgeting from hundreds of people over the years, and this is probably the point where you’re expecting me to launch into a paragraph about how your morning Starbucks trips are going to send you into the poor house. Luckily for us all, I’m not going to be that guy.
Creating a budget is easy, but do you actually know how to create a good one? I’ll admit, until recently, I didn’t. I figured as long as I kept track of what I spent I’d be all set. Well, I was only partially right. Here’s how to create an effective budget that will help you meet all those goals you set for the new year.
1. Decide where to keep your budget – Personally, I use Mint.com because it automates the process and updates your budget with your spending. But any other website, an excel spreadsheet or even a notebook and pencil will do if that’s what you’re comfortable with.
2. Determine Your Monthly Net Income – It’s simple. How much money are you bringing home each month after taxes? This is the number that’s going to be the basis for everything else in your budget. We use post tax income because you can’t spend whatever Uncle Sam is taking out of your paycheck in the first place, so why worry about it.
3. List Your Fixed Expenses – Fixed expenses are just what they sound like, they’re expenses you have every month where the amount you’re paying doesn’t change. Examples would be your mortgage/rent payment, car payment, insurance payments, student loan payments etc.. You get the idea, right? Make sure you account for all of them because these are things you have to pay every month regardless of anything else. Tip: I find its useful to include your savings amount in with your fixed expenses. ie: If you want to save 5% of what you make each month, treating that money like a fixed cost that you MUST pay makes it so much easier to get in the habit of saving and meeting your goals. After all, how many times have you heard someone say you should “pay yourself first”?
4. Itemize Your Variable Expenses – Again, they are what they sound like. Variable expenses are those things you spend money on each month, but the amount you spend changes depending on your moods and habits. Examples include: Groceries, dining out, entertainment, expenses for shoes or clothes, etc… This is the most important part of the budget because this is where you have the power to make changes. This is why I use Mint.com for my budget, all my spending is automatically tracked so it’s really easy to see how much I’ve spent in the past on each of these categories. If you don’t know exactly what you spend on these, estimate. Then as you track your spending for a few months you can come back and tweak your budget to reflect your actual habits.
5. Create Goals – Shockingly, this is the step a lot of people forget (me included for a long time!). Once you’ve determined all your expenses its time to set spending goals to try to meet in order to free up the cash you need to save for the things you really want to put your money towards. Your goals will obviously have to do with your variable expenses. Look at what you’ve spent over the past few months or year and set a goal to spend X% less on whatever it is you feel you could cut back on. When I made my budget for this year I saw I was spending close to $200 a month dining out at restaurants last year. So for this year I set my budget to try and spend less than $150/month eating out. If I stick to it I’ll have $50/month to put into savings or my IRA or whatever. And that’s just from one category!
6. Track Your Spending & STICK TO IT – Probably the hardest part is tracking what you’re spending your money on and making sure you stick to the goals you set. Again, this is why I recommend using a website like Mint.com (they should really be paying me at this point!) that way all your spending is tracked and automatically entered into your budget. Making it 10x easier to stick to your plan and save the money you want to save!
That’s it! Stick to your budget each month and then when the time comes to buy concert tickets or take a weekend vacation somewhere you wont have to wonder where you’ll find the extra money, because you’ll already have it set away just waiting for the opportunity to arise!