When you don’t have a budget you don’t really have control over your money or your savings rate. In fact, you don’t even know where all of your money is going! Creating a budget that works is all about going through the right steps in the right order. If you’ve had trouble creating workable budgets in the past it could just be that you weren’t using the best strategy!
By the way, I’m not claiming that this is the best strategy ever, but I do think it will work for a lot of people. Here we go:
STEP 1 – Assess Your Current Spending
This is key. You have to start with what you actually spend and not with what you think you spend. Do not assume you can accurately estimate what you spend in any category, you cannot. Instead, for one entire month pay for everything with credit cards, and spend the way you normally do. At the end of the month chart all of your spending categories (groceries, eating out, transportation, gifts, clothing, personal care, etc.). You’ll know you’re done creating categories when every single charge has a home. Be sure to add in recurring bills like rent/utilities that may not be on your credit card. Add it all up. Now you know how much you currently spend every month.
STEP 2 – Figure Out Your Current & Ideal Savings Rates
Now it’s time to do some basic math. Taking into account how much you’re making/spending each month, what is your current savings rate, percentage wise? I think this is important because the way the fella and I plan our budget is by setting savings percentage goals first and then tweaking our budget to get there. This is a huge part of how we’re able to save so much on an average income. Don’t despair if your current savings rate is low or even if you’re in the red each month. Once you have all the facts, no matter how ugly they are, you can start to rectify the situation. Never let fear of facts negatively affect your life, a few minutes of discomfort over confronting your financial situation will pay off!
STEP 3 – Write An Itemized Budget & Create Buffers
Once you have an idea of how much you’d like to save you can start to find ways to slash your budget. I recommend starting with easy to control categories, like luxury spending, groceries, eating out, etc. Write down your proposed budget for each of your spending categories and don’t forget to include all those pesky little things that add up over time, like personal care items, clothing, convenience foods, etc. Even if you don’t buy those items every single month you will need them some months, and on months that you come in under budget in those fluctuating categories you should put the difference directly into savings. That way, when you have to drop $30 at the pharmacy or unexpectedly pay $200 for a new winter coat it won’t demolish your savings that month. Budgeting is all about adjusting and compensating.
STEP 4 – Track Your Results
Try your new budget for a month and see how you do. Just because your budget is not immediately perfect doesn’t mean it’s not working, so don’t get down on yourself and definitely don’t give up! It takes a little time to find the right balance and allocation, and as your life changes your budget will naturally change as well, which brings me to the final step.
STEP 5- Check in Once a Month
The fella and I sit down and discuss our budget once a month. We look over our savings rate, drill down into categories where we overspent, and strategize for the next month. This sounds labor intensive but in reality we only spend about 30 minutes a month talking about money. Even if you’re single or don’t share finances with your partner I highly recommend you set a little once a month budget review meeting with yourself and take the time to go over your stats.
That’s really all there is to it! Remember, it’s ok if your situation isn’t ideal right now, all that matters is what you do moving forward!