Making a budget is something that many families and independent adults balk at. However, it is one of the most crucial steps for creating a healthy and viable financial foundation for future growth and stability. Here’s a few tips on how to create your first budget:
Know Your Numbers
The very first step that goes into making a budget is knowing how much money you have and exactly where you are spending it. This is where many people get bogged down in how to make a budget. Is it really necessary to track every single penny that is being spent on coffee and candy bars? The answer to this question is an unequivocal yes!
Unless you have a clear picture of where you are spending your money, it really isn’t possible to get your mind around what your weak points are. For almost everyone, it becomes easy to justify small purchases. However, these add up- more than most people imagine. Spending $1.00 a day on a cup of coffee doesn’t seem like much. Seeing on paper, however, that this habit eats up over $300 per year can provide perspective.
Understanding Income and Expenses
After you have assessed your available income and tracked your normal spending habits, it’s time to take a closer look at income and expenses. While this part of how to make a budget seems like a whole lot of accounting nonsense, it is really just basic arithmetic. Your ultimate goal is to make your expense line equal less than your income line: to live within your means. Getting this to happen, however, will take effort and discipline.
There are always going to be certain expenses that are necessary. Things like housing, power and food, for example, may not be subject to complete cuts. Add up the expenses first that are fixed and necessary, such as rent. You will then focus on the expenses that are required, but the amounts are negotiable or flexible. This includes most other life necessities, such as food, power, phone and transportation costs.
Take several months to find the average comfortable level for each line item.
Cut what You Don’t Need
Do you really need unlimited texting on your phone plan? Would a pre-paid service work just as well? Are you eating an unhealthy amount of expensive processed foods? Finally, do not even look at discretionary spending until you have done the first two categories. Frankly, more things than not fall into this category. Things like cable TV, family vacations and expensive Internet are not necessities for most families. In a extreme financial crisis, these should be cut completely from your budget.
Win in the Margins
Often, even after creating a tight budget, there is still a discrepancy between income and expenses. If your family makes a reasonable income, then you need to downsize housing or look for other areas to make deeper cuts. However, there is always the possibility that spending isn’t the root of your budgeting issue. Instead, you may be experiencing an income crisis.
Don’t be afraid to look for non-traditional ways to boost your income. Moms can easily find work-from-home jobs that pay a good part-time wage without incurring daycare expenses. Getting a second job or a small weekend business is also an option. There is nothing quite as crippling as debt, so do whatever it takes to get your budget in line with what you need to actually live.
In the meantime, use cash; if you don’t have, you don’t spend it- period.
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Thank you for writing that article because for people like me who never really made effort to fully behave within my budget, all this information is very helpful. Thanks again, and keep up the good work!
This post was very realistic in terms of setting up a budget. Often times we don’t realize how little spending habits add up over time like our coffee purchases and atm fees. I agree that we should track our spending regularly to maintain an effect and realistic budget.