“A budget is telling your money where to go instead of wondering where it went.” - Dave Ramsey
A personal budget is one of the easiest things to create but one of the hardest things to maintain. In order to tackle your debt, or reach your personal financial goal, a budget is necessary.
1. Figure out what media you would like to use. Some people make their budget through an online financial tracker like mint.com. Others, like myself, prefer good ole pen and paper. I have a notebook that I use to budget out my monthly expenses and then break it down even further into where each paycheck goes.
2. Make a list of all your expenses. This is the most time-consuming part initially. You need to list everything. This includes things like once a year membership fees, auto insurance, etc. For the yearly fees, I divide the total by 12 to see how much I need to save monthly in order to have the money when the time comes. If you don't know exactly how much you spend on things like groceries, go through your bank statement and total up all food related costs for that month.
3. List income sources. Record how much you have coming from your main job, side job, everything. If your total expenses exceed your monthly bills, then you have to either generate more income or lose some bills.
4. Create a list of your debts. This includes credit card bills, mortgages, student loans, and auto loans. As scary and disturbing as it is initially, its beneficial to see your whole financial situation laid out in front of you. Now that you know how much debt you have, it is easier to get motivated to pay it off.
5. Track your spending for a month. When I first started making a budget, I would use the envelope system. This is where I would go to the bank and pull out the exact cash I needed for the week. I had an envelope for gas, groceries, etc. Anything that I would usually swipe my debit card for, I used cash from my envelopes. It worked well for me because if one envelope ran out of cash, I had to use money from another category. This helped me realize just how much I was spending in each category.
6. Allow for flexibility. Your first draft of a budget will most likely not be your last. If you make a budget and then realize you spend less on gas than expected, adjust accordingly. The goal is to designate a job for every dollar that you make. Even if you have to make a category called “fun money.”
7. Don’t forget to pay yourself first. This was (and still is) the hardest concept for me to grasp. I want to use every penny I make to go towards paying bills or enjoying life and have a hard time consistently “paying myself first,” which essentially just means putting money into savings. Life is full of surprises; it is important to build some sort of savings account or emergency fund.
8. Track, track, track. The key to living by a budget is to actually use it. I designate time every Sunday to do laundry, cook food for the week and budget. By having a certain time set aside to check over your budget, you are more likely to spend within your means and meet all deadlines.