Oftentimes people don’t have a budget because they don’t feel like they need one. When I graduated from college and got my first job I knew that I had enough money to cover my bills each month so I considered anything extra my “slush fund”. It took me a few years to realize that I didn’t have a plan for my money. If I had been more intentional about budgeted, my money could be working for me instead of simply sitting on the sidelines. Once I became intentional with managing my money I saw huge results in my savings, investments, and my credit score!
If you want to start budgeting your money but are unsure of where to start you are in the right place! Budgeting can be an intimidating process, especially when you are juggling so many other things in your day to day. There are lots of different ways to track and manage your budget that will make the process stress free. These are the steps you need to take to build a budget.
I may earn a small commission for affiliate links in this post at no extra cost to you. Please read my disclaimer for more information.
Know your numbers
These are a few things to think about when building your budget:
- What is the total cost of all of my fixed expenses?
- When are my bills due each month?
- When do I get paid each month?
- What are my total monthly earnings?
Total Fixed Costs
What are all of your monthly fixed expenses? This includes bills and essentials such as housing, food, and insurance. Make sure to account for discretionary expenses as well. This includes eating out, subscription services, clothes, and other non-essentials.
Not knowing your expenses inside and out is where people face the most trouble. Create buckets for category of spending and stick to that amount. You can keep your money in different bank accounts or even use the envelope system. The envelope system is allocated cash in individual envelopes. Once all of the cash is spent, you can’t spend any more money in this category. This is a great method for grocery spending and discretionary expenses.
Know When Bills are Due
Use the list of bills that you have for the month and put the day they are due next to it. In some cases you may have bills that are once a year or quarterly. Make sure those are accounted for as well. Knowing when each of your bills are due will keep you organized. This is especially the case if you are paid weekly or bi-weekly.
Know When You are Paid
This may be self-explanatory but it is important to know when you are paid when building your budget. Your budget is ultimately based on your cash flow and you need to know when that cash is coming in! For example, if you are paid on the 15th but have bills due on the 5th of the month, that means that you need to have money set aside from a prior pay check to pay those bills. If you are in a household with more than one income, make sure you’re on the same page on how the bills are split and when they are due.
Calculate Total Earnings
Your total earnings should be calculated on a monthly and annual basis. When calculating your budget you should use the amount after any deductions and taxes. If you find that after doing all of the other steps that you are spending more than you are earning, it may be time to evaluate your spending. If your expenses are higher than your earnings you are spending above your means and that is not sustainable.
First, look at your discretionary spending and see where costs can be cut. If that is not enough, you may need to look at scaling back your lifestyle. This could mean downsizing to a cheaper car or selling some items that you don’t need anymore. You want to get to a point where you have money left over because this gives you more options in the long run.
If you find that you have more money after paying all of your obligations, now you have to decide what you are going to do with these funds. This is the fun part!
—
Paying yourself first
When I first graduated college, my main priority was paying off my student loans, so I put all of my extra money towards that. I truly thought I was paying myself first because I am increasing my net worth by paying down debt, but I was wrong. It wasn’t until there were other things in my life that I wanted that I couldn’t afford that I realized the problem. I needed to save and pay down debt at the same time.
Since I didn’t have a true budget in place I realized that I didn’t have any real long-term savings and investing goals. Sure, I had aspirations of how much I wanted to have after a certain amount of time, but I had no concrete metrics on how I was going to get there. Now that I pay myself first, I know EXACTLY how much money I have for savings and investments each month.
The following are ways to pay yourself first:
- Emergency Fund
- Saving for Retirement
- Investing in multiple streams of income
- Saving for the things you want
Have an Emergency Fund in place
It is always important to have a safety net. As you get older and your obligations grow it is important to plan for the worst. Not only will having an emergency fund give you peace of mind but it will also provide the freedom to take risks you wouldn’t be able to make otherwise. You could take a sabbatical from your job to do something you love, start a business, or move to a new place.
Having an emergency fund gives you the breathing room to think beyond the now. Once you have an emergency fund that covers 3 – 6 months of expenses, you can focus on other long term goals such as retirement. You need to have an understanding of your expenses to be able to have an emergency fund that meets your needs. Refer to the budget you have created for guidance on what is essential or discretionary costs to determine how much you should save.
Save for Retirement
While retirement may feel long off, it is important to prepare early. The earlier you start, the longer your money has to grow. If you have an employer that offers a retirement plan, consider contributing enough where you get matching benefits. Otherwise, you are leaving money on the table.
There is also the option of opening up an Individual Retirement Account (IRA). An IRA provides you more control over your investments. You can choose between a traditional IRA or a Roth IRA depending on your financial goals.
We have no clue what the state of Social Security will be by the time it is time for us to retire so it is important to have a plan and be prepared for the worst case scenario.
Investing in multiple streams of income
Investing for retirement is important, but it’s also important to invest for the short to not so distant future. With so much going on in the world, a paycheck is never guaranteed. It is important to create multiple streams of income to mitigate risk and increase your wealth.
These streams of income can be passive or active. You could pick up a side gig or create a passive stream of income through an investment portfolio. The important thing is to just get started. Even if you can’t afford to invest in the income stream you really want in the beginning. Start small and once you gain traction you will have more opportunities available to you!
Save for the things you want
While it is important to save for the things that you need, it is important to have money set aside for the things that you want. Be intentional about your goals. Do you want to go on a vacation every year? Allocate the funds in a high yield savings account every month. By saving for the things that you want, have something to motivate you and look forward to. Also by saving for the things you want you don’t have to worry about going into debt!
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
