Easy Steps to Starting a Personal Budget for Beginners
Budgets are scary, and they're easy to make, but SO hard to stick to. However, there is some solace in knowing my own cash flow - to know what’s coming in and what’s coming out so I can plan for a better future and for those sticky situations that are always so unpredictable!
Calculate net monthly income.
This is income that you get as a paycheck every month, after you’ve either contributed to your company's 401K and federal and state income taxes have been taken out. This is the number you work with on a monthly basis to pay your expenses.
Calculate fixed and unfixed expenses.
This includes those expenses that are known every month, at a fixed amount, such as housing (rent or mortgage) and insurance (health, car, life, etc). Unfixed expenses fluctuate each month, such as utilities, electricity, groceries, entertainment, etc.
Keep in mind, both fixed and unfixed expenses can be either necessary or unnecessary. That gym membership online that you never access is a 'fixed' expense, however it's not a necessary fixed expense.
Divide the fixed and unfixed expenses into either Necessary or Unnecessary.
Now this might be hard for some people to do. That coffee I buy at Starbucks is SO necessary for my daily productivity…wellllll….not really. You can always make coffee at home and save yourself that $6.00 every morning. The bottom line, necessary expenses are those products or services that you need to function in life - this includes transportation (to get you to work!) and housing (you need that roof over your head). Unnecessary expenses would be that daily (or twice daily) cup of Starbucks or eating out at restaurants every day for lunch. Admittedly, this step takes some time to process but you’ll be that much better off by knowing what unnecessary items your money is going towards and where that money could be directed.
Adjust your habits, if necessary.
I'm very much a visual person, so having a visual look, on a piece of paper, of what's coming and and what's going out is helpful to me. Now that you have a good idea of where your money is going through fixed/unfixed and necessary/unnecessary expenses, take a look at your overall cashflow. Where is most of your money going? Are you eating out more than you need to? Where are areas where you can decrease the unnecessary spending?
Allocate about 20% of your monthly take-home pay to financial priorities.
20% is not a hard and fast rule. That’s about the average that's been touted as 'should' be doing; however, even if it’s only 10% or even 5%, anything is better than nothing when it comes to saving. Do a percentage that you can manage now, and if you get that 1% or 2% raise, live within the same means as you did before the raise, and contribute that extra money towards your financial priorities (this can include retirement, credit card debt, student loans, etc).
Give yourself a weekly allowance.
On average, people should spend no more than 30% of their take home pay on fun things or personal lifestyle choices - I call this ‘fun money.' To determine your weekly allowance, calculate your yearly take-home pay (monthly pay checks x 12) and divide by 52; then multiply that number by 0.3 (or if you are living on a smaller percentage of 20% or 25%, you can multiply by 0.2 or 0.25). This number is your weekly allowance. Not all budgeting is terrible - you need to allow yourself for self care as well! Maybe you can substitute that extra money you would have spent on coffee to, perhaps, a massage every other month. By doing that, you’re saving more overall, but still spending a little extra to reward yourself and to still be able to enjoy your life.
A budget is personalized and individualized for your own (or your family’s own) needs and lifestyle. I started doing the following above as a basic structure and foundation to starting a budget - but always check and re-check monthly to see what is working for you and what isn’t. It takes time to fine tune and master the art of sticking to a budget. I’m always constantly making small tweaks and refinements as my lifestyle and needs change over time. Nothing’s perfect; finding a budget that works for you takes trial and error. Now that the easy part is done, it's finding the motivation to stick with it and reassess that budget monthly, if not weekly!
For more tips and tricks, check out my series on "Debt Free by 33," which is my own personal journey on debt repayment and money management.