If you want to achieve your financial goals, you’re probably going to need a solid budget to get you there. Here’s how to get started.
You want things in life, but chances are you’ll have trouble getting there without a solid budget. Budgeting may sound simple, but if your plan is flawed, you might struggle to get to the finish line.
Here are some steps to consider:
If you’re a salaried employee, this should be pretty easy—just look at the take-home pay on your paychecks. If you’re a freelancer, entrepreneur, or work in an industry with variable wages, take your best estimate by averaging your monthly income from the last six to twelve months. This should give you a general benchmark of your monthly income. To be conservative, you can choose instead to work off of the lowest monthly income you earned in that time period.
This includes student debt, car loans, credit cards, mortgages and so on. Write down the total you owe on each of your loans, plus the minimum monthly payment amounts. Total up all your various minimums. For now, assume that you’ll pay only your minimums.
These are recurring expenses that crop up in the same amount each month. For example: rent, insurance premiums, internet and cable bills, gym memberships, daycare or tuition fees for your kids and subscription fees of various stripes. These are expenses you could change—moving to a new apartment, switching to a different insurance plan, quitting the gym, canceling your cable subscription—with some effort. Total up all your fixed expenses and write that number down.
These expenses fluctuate more each month. They often include discretionary expenses such as groceries (you need to eat, but it’s your choice whether to buy that fancy organic mayonnaise), entertainment, going out, shopping, travel, charitable giving and so on. Look back at your past few credit card bills or bank statements to gain a sense of roughly how much you spend in each category on a regular basis. Total those up for a monthly average.
Not every expense is monthly. For example, there are birthday and holiday presents, weddings or other events, and so on. To make sure that these one-offs don’t catch you by surprise later, try estimating how much they cost you on an annual basis. Then divide by 12 so you can budget throughout the year.
Take your total income and subtract your monthly debts and expenses. If you’re left with a negative number, you’re spending more than you’re making, and something needs to change. Are there any opportunities for you to make more money, whether at work or through a side gig? Could you go out less or make other lifestyle changes? Are you able to make any longer-term changes, like canceling recurring subscriptions or finding less expensive accommodations? Is it possible to refinance any of your debt? Focus on making this number positive before moving on.
Provided that you’ve got a positive number after doing the math for your current expenses, it’s time to talk about your future.
Do you have a rainy day fund in case of an emergency, like job loss or unexpected car repairs? Are you prioritizing the repayment of your debts? Are you saving for retirement? Looking to buy a home or make another major purchase? Trying to build an education fund for you or for your children? Are you looking to grow a nest egg without a specific timeline in mind?
List your top priorities to start figuring out how you’ll use the room in your budget that’s left over after your necessary expenses. Depending on your timelines, decide whether it makes more sense for you to save vs. invest your money for each goal. You might also take this opportunity to allocate more than the minimum repayments for your loans.
One great way to take the stress and thought-intensity out of financial planning is to make your savings and investment contributions automatic. Most banking and investing accounts allow you to create recurring contributions, and you might even be able to set these up directly from your paycheck. It’s also less painful to siphon off money toward important goals if you haven’t already had the cash in hand—there’s less of a feeling of relinquishing something.
First, you could create your own spreadsheet to track your earning, spending and saving. If you prefer techier solutions, there are a number of online tools that you might find useful. At the end of the day, you’ll want to settle on the budgeting style that works best for you. Will you count the cents on every last coffee, or do you prefer to think about your spending in broad categories? Whatever fits your own personality is what’s best—because the most important thing is to create a sustainable system that you can actually stick to.