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I have said time and time again, the key to financial success is understanding how you spend your money and using that knowledge to make wise choices. The only way to accomplish this is through budgeting! Figuring out how much you spend on food, entertainment, medical expenses, and even shoes can help you plan for the month ahead. But how do you do this? Where do you start? Right here, right now! I’m going to show you the right way to set a budget and how to crush it every month!
When you are on a mission to save money, you might say, “I’m on a budget,” but there is a big difference between being on a budget and having a budget. Unless you have planned out your spending for the month, taking into account your income and allotted savings, then you have not budgeted.
The Right Way to Set a Budget
If you are not using financial management software to track your spending – I recommend starting now! The effort of having to manually compile your spending will only deter you from actual budgeting. My personal choice is Mint.com, a free service that tracks your spending to help manage your money.
Categorize Your Income & Expenses
The right way to set a budget is to look at all of your outgoings for the past 2-3 months and get an accurate snapshot of your spending. Either in your software or on a spreadsheet, categorize every dollar spent via cash, credit card, and from your bank account on bill payment, etc.
Now, look at your earnings. This may be one or two deposits a month or a combination of many checks if you are an independent contractor or freelancer. Once you have all this information, your app will total each category so you can see where you’re spending your money each month.
Analyze Your Spending
It’s time to come to terms with your spending habits, and sorry to say, this step will be the hardest part. After you have accurately categorized where all your precious money has gone, you need to decide if you have spent it wisely.
First, take the total of your spending and subtract it from your income – is there money left over? If you are running your household at a deficit each month, it’s time to start cutting back immediately. Even if you have some money left over, there is always room to cut back.
Grab a sheet of paper or get out your laptop and group your expenses into three categories:
- Fixed Costs – rent, utilities, car payments, insurance, etc.
- Necessities – groceries, gas, clothing, and home supplies.
- Discretionary – dining out, traveling, coffee shops, entertainment, etc.
Now, analyze your habits to help find areas where you can cut back. It may shock you to see how you are spending in these categories; it adds up quicker than you think! Do you need to purchase lunch every day? Are those weekly manicures worth it? Was that new handbag an actual must-have? Start asking yourself the hard questions, and answer truthfully to set a plan for future spending.
Set Your Budget
As you can see, you should start with your income, taking into account all your sources. The right way to set a budget is to always save some of your income every month. Transferring money to your savings should be the first thing you do before you start spending. Based on the information you have from your previous months of spending, estimate your fixed cost and various utilities. Next, calculate how much you will spend on necessities, like groceries, gas, etc., utilizing your prior month’s spending as a guide. At this point, you can see how much excess you have for discretionary spending.
When budgeting, you need to decide what is most important to you and determine how much money to spend in each category. If your gym membership is essential, make sure it is listed as a line item in your budget under your fixed costs and other necessities. Categories you plan to allocate a specified amount each month need to be listed. Those items that are not as important or don’t have a fixed value can go into the “Everything Else” category. Adjust your spending until you have come up with reasonable amounts for each category, so at the end of the month, you are spending LESS than you are bringing in!
How To Crush It
There is no point in having a budget if you are not going to stick to it. It doesn’t matter what method or financial app you use to sift through your finances. The key is setting a schedule and doing it! Since many of our discretionary spendings happen over the weekend, I find that Mondays or Tuesdays are great days to review your finances. I set a reminder on my phone to go through the past week’s transactions every Tuesday at 1:31 pm (I know it is an odd time, but it works for me). Find a time that works for you and stick to it!
Monitor your spending and set alerts! One thing I love about Mint is that it automatically sets budget alerts for you. So even if you aren’t diligent about tracking your spending, they will send you weekly updates and messages when you’re close to hitting your spending limit in a particular category.
Being financially responsible will not be an easy task at first, but managing your budget is time well spent. It will be your guide to healthy spending and an important tool for your financial success!
The Right Way To Set a Budget
Consider the following tips:
- Spend less than you earn
- Set realistic spending limits
- Understand expenses may vary from month to month.
- Put money aside for savings and debt payments first.
- Realize every month is a new opportunity to make more progress.
Let me know if you have any questions or share your budgeting tips with me!