I know, I know…budgeting sucks and it’s boring.
Here’s the inside scoop – budgeting is extremely important when it comes to improving your finances and winning in life.
Don’t worry, I’ll make it simple to follow so you’re able to easily figure out what you need to do to set up a budget and be on your way to having your money under control.
By the time you finish reading this post, you’ll know how simple it is and you can be one step closer to your financial freedom.
A budget is a simple breakdown of your income and expenses and shows you where you can cut down your spending so you can do other things with that money, such as paying off debt or increasing your savings account. It gives you a clear picture of what’s going on with the money side of your life.
And if you have debt, a budget can tremendously help you make a plan for getting rid of it. I remember when I paid off some long-time credit cards…boy, did I feel happy that day!
IMPORTANT – a budget only works properly if you’re honest with your numbers. To make an effective budget, you must have detailed and accurate information about your income and expenses.
A great side benefit of creating a budget is that it’ll show you your spending habits upfront – some might not be pretty to look at but if you want to get your money under control and live a debt-free life, you need to look at these stats head on and make a change.
Let’s get started.
1. Calculate All Your Income
The first step in creating a budget is to calculate all your income – this includes your main income (job) and any extra/side income streams – side business, rental income, trading gains, etc.
An easy way to get all this information is to gather/download your:
- Bank statements
- W-2s and paystubs
- Investment Accounts
If your income is simply a regular paycheck and nothing else, adding up your monthly net-income (take home pay) will be all you need.
2. Gather All Your Expenses
Next we’re going to add up all the expenses incurred on a monthly basis. This list includes:
- Mortgage or rent payments
- Insurance
- Loans – auto, student, personal
- Credit Cards
- Cell Phone Bills
- Health Insurance
- Auto Insurance
- Groceries
- Gas
- Utilities – electricity, garbage, heating/cooling, etc.
- Childcare
- Internet
- Entertainment Subscriptions – Netflix, Spotify, movies, etc.
- Transportation
- Eating out
Basically anything that makes you spend money on a monthly basis, write it down in your expense list.
Having your expenses written down can be an eye opening experience for some of you.
It’s always easy to have a rough idea in your head about the big expenses. But in many cases once you see how much you’re spending on things you don’t always pay attention to, it can get a little scary to look at.
‘Sheesh…do I really spend $200 a month on coffee?’
3. Figure Out Fixed & Variable Expenses
This step is to help you figure out which expenses are required to maintain your lifestyle and which can go up or down depending on the week or month.
It gives you a flexible viewpoint on where you can cut down on and save some money.
Fixed expenses – these are typically expenses that can’t be easily changed. Typically these include mortgage/rent payments, auto/student/personal loan payments, internet & phone bills, and other essential bills that usually stay the same from month to month.
On the plus side, they’re easy to include in your budget since they most likely won’t change and thus can be easily accounted for the whole year.
Variable Expenses – these are your expenses that you can be a little more flexible in. These include your grocery, gas, electricity (because you can spend more one month than another), eating out, entertainment, etc.
Typically expenses that aren’t the same every month. Here is where you can really start to figure out which expenses you can reduce or cut off completely so you can put your money to better use, like a savings account or paying off your credit card debt.
4. Figure Out Your Bottom Line
Now that you’ve written down your monthly income and expenses, it’s time to tie the whole budget and get to the bottom line.
By taking your income and subtracting expenses, you can see if you’re saving money (bottom line is positive) or spending more than you earn (bottom line is negative).
This is where the real work actually starts. Now that you have all your income and expenses in front of you, you can easily see which areas you can’t move around and which items you can take out if your goal is to be financially responsible and free.
Once I got serious with my money, I had to sit down and think about which things on my expense list I could cut down on. These included coffee, eating out too often, entertainment subscriptions… By themselves they’re small amounts, but together they were costing me hundreds every month!
5. Make Adjustments
If your expenses are higher than your income or if you want to increase the gap between your income and expenses, you can make some adjustments so your budget leans more in your favor.
Discretionary Expense – an expense that is not essential for operating your day to day life.
Read more about discretionary expenses here!
There are several goals or action-plans you can have here:
- Aim to have your income and expenses equal to each other
- See which items you can reduce spending on – such as eating out or entertainment, since these are discretionary expenses (which are based on wants rather than needs).
- See if you can switch to cheaper alternatives to your fixed expenses – finding a cheaper auto insurance provider, switching phone plan to a cheaper one (a lot of phone carriers have new customer discounts!), or refinancing your auto loan. Go through each fixed expense and see if you can find cheaper alternatives to them, bringing the total amount down.
- Check which variable expenses you can reduce or let go of. This is one of the most impactful things you can do to improve your bottom line. If you want to improve your financial life, it is extremely important to think about necessary spending vs discretionary spending. Discretionary spending needs to be reduced to get you to your goals faster. This means cutting down on things such as having multiple entertainment streaming services, eating out, entertainment, etc.
IMPORTANT – If your goal is financial freedom, the most important part of your budgeting goals should be to cut down on loans as fast as possible.
By reducing your expenses, you can put that money towards your loans instead. The sooner you reduce your debt, the sooner you’ll achieve your financial freedom.
6. Track Your Budget
You now have a budget ready! Budgeting is a long-term game, so you have to keep updating it monthly and even weekly if you want.
We suggest creating a simple Google Sheets spreadsheet to keep track of your budget each month.
You can make tabs for each month or just have it all in one tab, whichever works better for you. This allows you to look ahead for the whole year, since you have an accurate idea of how much money you bring in each month and how much goes out.
A step further shows you how many months/years it will take you to reach any financial goals you have – whether it’s to have a certain amount saved up or getting rid of your debt.
TIPS ON BUDGETING BETTER
- Since we’re all about financial freedom and extra income here at Fineedom, having a savings goal should be a top priority when budgeting.
- Pay off your debt. If you have debt, you’re limited to how much money you can move around to achieve your goals. So getting rid of that debt as soon as possible should be another top priority.
- Keep an eye on large expenses so you’re not blindsided by them.
- Closely track your discretionary spending to get the most accurate information submitted in your budget, as they can fluctuate month to month.
- Make a schedule – set a day aside once a week or month to update your budget and stick to it.
- BE HONEST WITH YOUR EXPENSES – It’s tempting to underestimate some of your expenses like eating out or snacks, but being real with your numbers is very important.
- Improve your financial skills to familiarize yourself with money and take control of the finance side of your life!
Best Apps for Budgeting
You can make your life easier by using budgeting apps! For many of them, you can connect your bank account to them so your income and expenses are automatically tracked!
Some of my favorite apps are:
So there you have it – How to make a budget in just 6 steps. Hope you liked it!
Follow these steps to create your own budget today and have some financial peace.
