Too many people set up their budget and let it go without tracking it or updating it, or worse, alter it ad hoc. When we first start pursuing saving goals, we often miss them because we’re distracted by everything else.
Deciding on the right medium to keep track of your budget (e.g. apps or a digital document) is essential. A monthly budget can help you set limits, meet your financial goals and attain financial security. Here are some tips to help you create a budget that you can happily stick to.
The Basic Calculations
Determining the allocation for each set of items can be difficult but online services are there to help. You can create your own monthly budget template or find one in Excel or Pinterest or elsewhere online. These programs can help with the calculation, but they can’t do the prioritizing for you. It helps to separate your liabilities and expenses into major categories, for most people these include food, healthcare, housing, insurance, and transportation. Start with your take-home pay after tax and deductions. If you’re paid hourly, calculate a weekly or monthly average.
Secondly, calculate your fixed expenses, such as your rent/mortgage, utility, and phone bills, fixed rate debt and loans. For those expenses with regular, predictable variability – such as grocery costs – you can just calculate the average. It’s a good idea to place an upper limit on these. Finally, you’ll calculate your irregular expenses, those which vary quarterly, annually or seasonally. Car insurance and annual memberships of clubs will fall under this category. Add up the quarterly expenses, add them to the annual expenses and divide by 12: now you can factor them into your monthly plans.
Savings are not only for retirement or for people without assets. If you start saving today you can avoid pulling out payment plans or credit cards in the future. Your essential furniture (mattresses, couches etc.) only last a couple of decades. Appliances like refrigerators and dishwashers can fail at any moment. Even if you have a car, you’ll need a replacement one day. No credit loans are available for emergencies if you need to supplement your savings, just make sure to use them judiciously.
Building Savings Into Your Budget
With your total income and expenses recorded you’ll have a clear view of the financial goals attainable in the short-medium term. You’ll have discovered that you don’t know where you’ve been spending money to have nothing left month by month. Overview the previous year’s expenses looking for unexpected expenses and see what you can do to avoid them this year. The trick to reducing expenses is in altering the variable, non-essential expenses. Lowering expenses such as beauty, shopping, entertainment or eating out can make a lot of difference. Home-made remedies, cooking fancily at home and other alternatives can help. Eliminate some such expenses, and reduce the rest by 10%.
Automating and Building in Flexibility
Automate your saving so that every time you get paid – or at set intervals, if you don’t receive regular payments – you have a regular contribution to your savings. Just make sure not to lose your mind when you get extra money – set up a plan for how to use it rather than having it sit in your account and be incrementally withdrawn. Build flexibility into the plan: if you’re allowing yourself to spend more during a certain season or circumstance, what will be your upper limit?
Be realistic about discretionary money, you will inevitably spend some, so budget it. This will help you keep track of this kind of spending. There are many budgeting models you can use. Reverse budgeting involves creating saving targets, then allocating specific sets of money for those time periods, like paying yourself. Zero Sum Budgeting involves using all leftover money from any budget to pay off debt or putting into savings, rather than having ‘leftover’ discretionary income. The 50/20/30 rule involves setting aside 50% of your income for essential expenses like housing and groceries, 20% for financial priorities such as debt payments or saving contributions and limiting your lifestyle (e.g. entertainment) expenses at 30%.
Evaluate as you go: beware your spending limitations in the middle of the month and readjust accordingly. Always ensure your overall expenses are kept at a steady level below your income. Budgets can be intimidating, especially when you start out. But as with other things, practice makes perfect. Good luck!
Patrick Herbert works with people to get their finances on track as well as their lives. A motivator, a life coach, a money guru, call him what you will!