Do you need a budget but have no clue where to begin? Look no further, here’s the guide that will set you up with your very first budget and help you fine-tune your current budget if you already have one.
Welcome to the second post in the Living Below Your Means series. If you’ve figured out your WHY for living below your means, you should be ready to attack your budget head-on.
You knew this one was coming, right?! Don’t worry, it’s not as daunting as it might seem.
You can do the bulk of the work in an afternoon or evening and then you can get the rest done with a little time invested at various points throughout the next couple of weeks.
I will lovingly remind you that you might feel miserable but it will only last for a short while and then the joy kicks in.
You’ve Already Got a Budget
If you already have a budget, I still suggest you go through the process I’ll describe in a moment.
It will be much faster and less daunting for you because a) you already know your numbers fairly well and are more or less double-checking and b) you are already a belief in the power of a budget, hopefully.
Oh, and a budget is not something you made six months ago and haven’t looked at since. Having a budget means you sit down every month and look at where you want your money to go and why.
What is a Budget?
If you aren’t living below your means at the moment, a budget is the most important tool to get you there safely and in the shortest amount of time.
If the word budget freaks you out then let’s begin by defining what we mean by it. A budget is how you tell your money where to go. This means you are the boss and the money has to do as it’s told.
If you are going through this series in order, you should have a nice list of what your priorities are, what you want to keep spending money on and what you can stop spending money on. Have that list handy.
To Make Your First Budget, You Will Need:
Besides the list, here are some other things you will need.
- Highlighters or coloured pencils
- Bank statements for at least three months prior to this month (online or printed)
- Something to drink (preferably something that relaxes you but isn’t alcohol)
Have you got all of it? Well then, no reason to put it off any longer.
Begin With Your Income
I like to start by knowing how much money you have coming in every month. Once you have an overview of what happens monthly, you can start to budget per paycheck if that makes more sense for you.
For now, list all household net income during an average month. That’s money from day jobs, second jobs, dog sitting, allowances, state benefits, etc. If it’s coming into your account regularly, you need to include it in your total income.
If something is more of an occasional income, meaning it isn’t something you can count on, put that on hold for a while.
If you get paid hourly and never know how much you get, then look at the past three months of paychecks and choose the lowest one as your income if you want to be conservative or the median if you feel like that’s more accurate.
You hopefully have a decently big number now that you are staring at.
Take a moment to look at that number. Is it more or less than you expected?
Can you already tell that you are in trouble because your mortgage alone is almost all of that?
No matter if you feel like you just got a raise or if you are staring down a black hole, don’t stay there too long. There’s work to be done and remember this is just a reflection of your current life. You’re about to make changes that will ensure you’ll never be here again (if you don’t want to).
Time to Face Your Expenses
Now that we know how much (or little) you have coming in, it’s time to list all the big necessary expenses such as housing, insurance, utilities, debts. Look at your bank statements to figure out what all your big expenses are.
This is where the highlighters come in handy because we are about to have some colouring fun! On your statements, highlight everything that you feel is a necessity in the same colour.
I won’t tell you what I think is a necessity. You’ve already done a good job figuring that out for yourself.
Get Real About Groceries
Now that you’ve found all of them and added anything you had missed to your budget, you can move on to the next category: groceries.
Pick up a new colour and highlight everything you consider groceries on your statement. Add up the numbers for each month and use the median or the highest number in your budget.
Don’t include take-out, restaurants, coffees etc. in this category, those need a category on their own. You may even want to split them into food and beverages to get a clear idea of where your money is going.
Do You Find This Entertaining?
Next, we have entertainment. This is a broad category that you can fit a bunch of things in. A general guideline is that these things are not necessities but are things you do with others or when you are bored.
You get to decide what you include in this category. Don’t be scared, pick a new highlighter colour and go to town.
Rinse and Repeat
Move on to clothes, then medical expenses and so on until everything on the statements have been grouped into a category and highlighted.
Don’t make a miscellaneous category. That’s cheating.
For each category, you total the monthly amount, find the median or use the highest amount in your budget, based on what you think is most reflective of your actual spending over a year. (This means if you had a month you were home in bed or out of town you etc, you can adjust for the added spending or lack thereof by choosing either the median or the highest amount).
Take a Deep Breath
Time for another check-in. How are you feeling? If overwhelmed comes to mind, don’t worry, you’ll get through this and thank me later.
Add up the Totals
Now that you’ve done every section, it’s time to add them all up. So get your calculator out and get to work.
Are you still with me or did you just have a minor heart attack?
You’re Almost Done With Your First Budget
It’s time to sit with your numbers for a bit. Look at them, take it all in. Know that this is just where you are right now, it’s not where you are going to stay forever.
This is all I want you to do for now.
You do not have to make any changes right now.
Instead, give yourself a pat on the back, celebrate in some small way and go to bed knowing you’ve taken a huge step towards living below your means.
This is not your final budget, in a way, it’s not even a real budget as we defined it earlier but more of state of the union overview.
Over the coming weeks, we’ll dig deeper into some of your expenses and how you can make changes that will actually bring you to a state of living below your means and make your money and budget work for you instead of the other way around.