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So you’ve finally been pestered enough by the good influences in your life and have decided to get your life together and make a god damn budget like an adult. Or maybe you are tired of feeling like your life (and money) is out of control. I feel you. You are not alone if you have no idea where to start. Basic finance is rarely taught in schools these days so if you don’t have parents willing and able to sit down with you and teach you this stuff then the internet is it. That’s totally okay though because making a basic budget is super easy and only takes a little time and a few steps. There are lots of different methods and theories surrounding budgets and budgeting in general but, don’t worry, you don’t need to know all that to get started. I’m going to walk you through the process that should only take you an hour or two to finish. Simple, right?
What a budget is
First off, what is a budget? Simply put, it is a way for you to see all in one place how much money you have coming in versus going out, and where specifically that money is coming/going. It’s also your financial roadmap so you can see where you want your money to go each month. Just like trying to drive across the country, it’s easier to get where you want to go if you have a map telling you how to get there.
What a budget is not
A budget is not a magic bullet to all your money woes. A plan is only as good as its implementation. If you don’t follow your budget, or do what I’ve done and never look at it until months later when you have no money in your account again (magically), then your time could be better spent doing something else. But, if you are serious about getting your money life organized then a basic budget is a first and exceedingly important step.
Why a budget is important
Knowing how much money you have and where it is going are necessary making “informed spending choices.” Which basically means that you can make smarter choices with your money if you know the big picture of where your money is going. Would you still buy that third cosmo of the night if you knew that it would mean you couldn’t pay your electric bill on time? Or, knowing that you have a little extra in your account this month you could splurge on that much-needed massage after a stressful week at work. It’s all about balance.
How to build a basic budget
1. Gather your bank/credit card statements or receipts
These statements can generally be found on your bank/credit card company website. Sometimes they’ll also send you paper copies if you haven’t opted into online statements. If you’re one of those cool people who use cash for their purchases then you’ll need to gather your receipts for the month.
2. List your income sources
This is everything from your regular paychecks, to alimony or child support, to financial aid packages if you’re a student. Write down the amount, the date you receive it, and how regular it comes in (weekly, bi-weekly, monthly, etc.) Next, turn those numbers in their monthly amounts. For weekly payments, multiply by 4. Bi-weekly, multiply by 2. For lump payments that occur less than once a month, divide that income by the number of months between payments. For example, if you have a $1000 dollar scholarship that pays out at the beginning of every semester (which is roughly once every 5 months with a 2 month summer semester), then that works out to about $200 per month for income.
Irregular income is a difficult thing to budget for. I would suggest finding the average amount per month you received over a 6-12 month period and using that to budget with. If your income is highly seasonal then use seasonal averages instead.
3. List your expenses
Do the exact same thing for expenses as you did for your income. One tip is to go back as far as you can in your statements to calculate your monthly average for variable expenses like food, electricity, and fuel. Also, don’t forget any savings goals you have.
Some bills don’t come up every month like tag renewals, property taxes, and gift purchases. Just like with lump payments, divide the amount by the number of months in the billing cycle to find your monthly contribution. The money for your non-monthly expenses should be set aside in a separate savings account so that you know they will be covered when the due date comes around.
4. Subtract your expenses from your income (and make adjustments as necessary)
Now, take the total of your monthly expenses, including the non-monthly expense contributions, and subtract it from your total monthly income. Ideally, this number will be positive. If it isn’t then you need to make some adjustments to your numbers either by decreasing your monthly variable expenses or by increasing your income in some way. Maybe both? Do this until you at least reach a net of zero.
5. Re-evaluate at the end of the month
Lastly, to step your budgeting game up to the next level take some time to realign. At the end of the month/beginning of the next month, sit down and see how you did. Where did you struggle? Were there any places that you went over budget? Under budget? Is there anything that you forgot to account for that you need to add to next month’s budget? This step goes a loooooong way in helping you set a realistic budget for yourself that you’ll actually stick to.
Congratulations you have a basic budget!
That’s really all it takes. Now comes the hard part. Actually sticking with it. Don’t worry though, I’ve found some tools to help you out.
Tools to make your life easier
- Personal Capital – a great resource for tracking your income and spending. They also make really detailed graphs of your net worth broken down by investments.
- Mint – Another online spending tracker. This tool is focused much more on helping you stick to your budget. I highly recommend you give them a try.
- Google Sheets – If you like the DIY approach to tracking your money, building yourself a spreadsheet isn’t a bad idea. Google Sheets allows you to store your sheet online for easy access when you want to check in on your money.
You have everything you need to build yourself a good basic budget. Just gather your statements, write down your income and expenses, and adjust as needed each month. You got this.