The simplest method of starting your budget!
Do you have a budget? Do you know what your bank balance is, and whether or not you’re on track to reach your savings goals? Can you afford to enroll your toddler in that awesome new kid-gym that’s just opened up down the road?
It may seem difficult at first, but having the answers to these questions in your head, or being able to open up a spreadsheet and figure it out, is one of the most powerful and comforting things you can do.
You can make solid holiday plans for 12 months time, and know you won’t have to put any of it on a credit card. Or book the kids in for an extra holiday activity, and treat yourself to a pedicure while you’re free of them – I mean, waiting for them to finish, obviously.
You can do all of these things with a basic beginner budget. Knowledge is power, and being across your dollars is the ultimate ticket to a secure future, regardless of your income. Budgeting your money in a way that works for you gives you power.
FIRST THINGS FIRST…
So often, I have people tell me they want to start a budget and take control of their money, but they just don’t know where to start.
“Easy,” I respond, “Track your spending.”
“But I know how much I’ve got coming in. Can’t I create a monthly budget from those numbers?”
“Track. Your. Spending.”
“How will that- ?”
“TRACK YOUR SPENDING!”
Yep, you guessed it. For even the most basic beginner budget, I want you to start by tracking your expenses as they are. Every cent out of your wallet, be it via card or cash, must be categorized so you can get a total figure.
Use Goodbudget (my personal fave), Fudget, Mint, or Pocketbook. All of these apps let you track expenses on the go; some will even connect to your bank account and track spending automatically. If apps aren’t up your alley, pen and paper will do just fine!
This is the most eye-opening experience of taking charge of your money. If you’ve never tracked your expenses before, I can guarantee you will find yourself exclaiming, “We spent how much on food this month?” at least once. The figures will astound you.
Once you’ve got a couple of weeks of data stashed away (working monthly or by paycheck is going to be the easiest option), go through these expenses and categorize them into some big main groups:
- Food / Groceries
- Bills, Insurances and Utilities
- Eating Out
It seems like there’s a lot there, but these big categories should cover just about every expense you have. Feel free to remove any that don’t apply to you, or add one that is relevant to your life.
Once you’ve got your spending categorized for the month (I’ll use this time period as an example, you do what works for you!), add up the category totals and compare it to your income. Did you spend less than you earned? More? Bang on even (noice!)?
If you’re anything like me when I started, you spend more than you earn. Even if it’s only by $20 you may think, “$20 a month from my savings isn’t that bad to live life without a budget! That’s only $240 a year!”
I’ve got bad news for you: overspending means taking away from future you. Full stop.
Only $20 a month put into a high-interest savings account turns into a bit over $1,200 in 5 years. What would you use that extra cash for? Is it worth giving up to overspend a little every month?
SET YOURSELF GOALS
With this in mind, set yourself goals within each category. If you spent $50 on take-out lunches at work this month, set a goal to only spend $40 next month. If your grocery budget is $600 a month between four people, have a look at what you’re buying and challenge yourself to spend $450 instead.
Budgeting is not about removing every bit of pleasure spending from your daily life, just cutting back on the things that aren’t really important in the short-term so you can have the big things in the long-term.
You can take a look at my detailed fortnightly budget, and see how I allocate my expenses.
Right, you’ve got your goals. You’re consistently tracking your spending. You know what’s coming in, what’s going out, and whether you can afford it all or if you’re living beyond your means. Now it’s time to step it up to the next level – this is where the fun begins!
We’ve all heard the importance of having an emergency fund for those unexpected expenses, like your car blowing a tire or your microwave exploding. An emergency fund is a great thing to have, even if it’s only $1,000 stashed away you will feel a bit more secure knowing it’s there for you in your time of need.
What about that really nice handbag you’ve been eyeing off recently? Or the weekend away with the girls? Or Christmas presents for the kids and your extended family? You could just put it on the credit card and pay off the interest for the rest of forever. Or you transfer small amounts from your income each week into a savings account and have a solid amount saved up in no time flat.
You can pay for Christmas in cash and hit the new year without the credit card debt hanging over you. All it takes is savings.
How much would you need for Christmas? Let’s say $800 to get your whole family thoughtful, modest gifts and have a little left over to put towards bulk rum ball ingredients. If you stash away a whole $15 a week for a year, you’ll have it ready to go come Christmas time.
It’s important to note that savings don’t have to be huge. You don’t need to live off 30% of your income and save the other 70% if you don’t want to (though it can lead to incredible financial freedom). You can save a few dollars here and there, put it away and watch it grow! High-interest savings accounts are your friend here, or you can use micro-investing apps such as Raiz to grow your small change in the stock market.
That’s it! It’s incredibly simple to set up a budget for beginners. Tracking your expenses gives you a wealth of knowledge about where your money is going, and whether you’re living within your means. Cutting your expenses and creating saving goals gets you ahead of the game and gives you some breathing room when it comes to big expenses.
The key to living within your means is spending less than you earn. Even better is spending less than you earn and saving the difference. My favorite method of growing wealth is spending less than you earn, and having the difference work for you to create more income. More on that in another post.
Let me know if you have any questions, or if you’ve got any of your own tips for creating a budget that works for you.