Steps to Unfuck Your Finances: Step 2
Take Charge and Create a Budget
So far on our journey together, we have gone through step zero and one of “Steps to get Your Financial Shit together”. Step Zero, “Begin with an End in Mind” talked about taking stock of your life and goals. In that step we set some financial goals, things like reduce debt, spend less, retire well, etc. We also made it through Step One, “Know Where You Stand”, which was all about tracking your spending. In that step we talked about making sure you know where each dollar of your money is going because you can’t get to where you want to go if you don’t know where you are now.
You need to know where each dollar of your money is going because you can’t get to where you want to go if you don’t know where you are now.
FinanceBitchBecca
The next step on our journey is Step Two, “Take Charge and Create a Budget”. Knowing how to create a budget doesn’t come naturally to many people, and most never receive such an education in school so a lot of people find themselves not knowing how to make and stick to a budget. But that’s why I am here to help.
There are a lot of ways to make a budget, and I encourage you to find the way that is right for you. We will go over some easy techniques as well and set you up with a good starting point in todays blog entry. Then we will go step by step to create a budget.
What is a budget?
A budget is an estimate of your income and expenses, divided into categories. It is a spending plan that takes into account how much money you have coming in and how much money is going out. There are many types of budgets and plenty of budgeting tools like apps and spreadsheets, or even dong it by hand. If you are new to budgeting or really just looking to get back to basics, I recommend starting with the 50/30/20 budget.
Budgeting isn’t about depriving yourself. It’s about finding ways to afford the things you care about.
FinanceBitchBecca
The 50/30/20 Budget
With this budget, you allocate 50% of your money to needs, 30% to wants, and the remaining 20% to savings and paying off debt. The first 50% of your budget is for needs. Your needs encompass things like, housing, some transportation, food, utilities and insurance. The next 30% is for wants. Wants include items like some travel, monthly subscriptions, dining out and entertainment. The final 20% of the budget is for saving and paying off debt. Before we go on, I want to mention that this budget is a starting place… and is also dependent on how you categorize wants versus needs. I encourage you to experiment and find what works for you.
How to Make a Budget Step-by-Step
Step One: Determine Your Net Income
Before you can get to the 50/30/20 split of your budget, you have to know how much you make. For this step you need to determine the amount of money you bring in each month. The amount we want is your “net income”, that’s what people commonly refer to as take-home pay, the amount you “take home” after taxes and deductions. **Note, if you have 401k or other pretax automatic savings taken out, add those back in to your take home pay amount.
Step Two: Find your 50/30/20 Split
Once you know your net income, you want to split it into 50%, 30% and 20% to know exactly how much money you have devoted to needs, wants and savings/debt. Let’s say that you bring in $3,000 a month after taxes and deductions. You would have $1,500 for needs, $900 for wants and 600 for savings/debt. If math isn’t your strong suit, here is a cool calculator I found on Nerd Wallet that does the math for you.
Step Three: Chose a Budget System
The envelope/jar system or a zero-based budget are two of the most common ways to budget. We will use the cash-based envelope system here since it is great for first time budgeters and people who need help getting their spending back in line. With the envelope/jar system you put your cash money into three separate envelopes (or jars). Each is labeled to indicate whether it is money for needs, wants or savings. Then when you get paid you put 50% into your needs envelope, 30% into your wants envelope and the last 20% into your savings envelope.
Step Four: Spend Your Money Based on Your Budget
This is probably the hardest part of the budget. Spending only (or preferably less than) what you have is no easy feat. Only spend what you have in each category. If you do not have enough money in an envelope for all the expenses in that category, you may need reevaluate your spending and find ways to reduce your expenses or increase your income.
Spend only what you have. Seriously.
FinanceBitchBecca
Reducing your expenses is usually quicker and easier than increasing your income though, so I recommend you start there. Reducing your grocery bill is often the quickest and most controllable way to decrease spending. If you want help with where to start reducing your grocery bill, check out my article on grocery hacking where I show you how to cut your grocery bill in half.