The hardest part about getting started with a new project is actually getting started! There are always so many different things that you could do “first” that you don’t know which one to actually do. In my first article in this series, I laid out the very first thing to do – assess your current state and understand how your history has contributed.
This article focused on the next step which is creating a budget.
Begin With History
I always struggled with how to create a budget because I would write down things like “Mortgage, Car Payment, Electric, Cable” and so on. When I got to things like “Entertainment, Clothes, Food” and similar, I would be completely stuck.
Stop trying to build a budget for the future and start understanding your historical spending. Look at credit card statements, utility bills, mortgage / loan statements, and anything else that will show you specific amounts that you’ve spent over at least the last few months.
It’s An Iterative Process
You are not going to have a solid budget on day one of your path forward. And, that’s completely ok. You didn’t get the point you are at today in a day, a month, or even a year. Building a plan for moving forward will take time as well and you need to accept that.
Your first budget will be little more than a guess based on past experience. Since you’ve committed to working on your finances, it’s important to remember that you have to keep coming back and tuning the details. Each time you improve details, your future budget will be a little better, and details will be a little clearer.
In the beginning, it’s best to break spending down into just a few basic categories. Identify monthly expenses that are, or can be, fixed amounts. Rent or mortgage, car payment, and similar items make up a regular and predictable amount of your monthly bills.
Another catch-all grouping is monthly expenses that are variable amounts. Monthly spending on food is a good example of this sort of expense as it won’t ever be the same between any two months.
The third major grouping to look for are non-monthly but planned expenses. This could include everything from an annual physical to an oil change to a vacation.
The last major category to think about is non-monthly unplanned expenses. If you get sick and have to go to the doctor unexpectedly or need a car repair done, these will impact your budget in a way that you can’t directly plan for.
Budget Your Income, Too
There is always a lot of focus on where the money goes, but you need to pay attention to where the money comes from as well. Since I believe income is even more important than expenses, I insist on tracking this as well.
Sometimes, this is very simple to track, but most times it is not. How often you are paid, whether you are paid hourly (especially if you work fewer than 40 hours per week) or salary, your annual income amounts (exceeding certain earnings levels will change how your taxes are deducted), and other variables can factor in to calculating your monthly income amounts. In almost ALL situations, it is best to simply estimate your income amounts and to be conservative when doing so.
Income Budget Example
As an example, assume you work between 25 and 35 hours per week and make $20/hour. You get paid weekly on Fridays. Instead of trying to do a hard calculation to estimate your income, use hard data to create a solid estimate. Find two payslips from the same year that are at least 2 months apart. The larger the gap between the two and the more recent the newer one is, the better. On each of these payslips, find the Year-To-Date total for Net Pay. Subtract the smaller (older) amount from the larger (more recent) amount – divide this amount by the number of pay periods to get an average amount per pay period. To determine the number of pay periods, get a calendar and count the number of pay periods in between (for this example, you’re counting the number of Fridays). Do not count the pay period for the older payslip but DO count the pay period for the newer payslip.
You now have a calculated average amount of Net Pay that you have been receiving in each paycheck. The larger the gap between the older and newer payslips, the more accurate this average should be. You now want to reduce this amount so that you are using a conservative estimate of future income. Try reducing the number by anywhere from 10% (multiply the result above by .9) to 20% (multiply the result above by .8).
Track With Software
Keeping track of everything with software will be the easiest way to manage all of your information going forward. You will be making changes and updates to all of the details regularly, and electronic updates will be easiest. One thing that is extremely important is to not store sensitive data in these documents. It’s one thing to say you have a $200 car payment, it’s another to list the account information. Also, be mindful of where this information is kept. Don’t put it “in the cloud” unless you know what you’re doing.
Using something like a spreadsheet can also allow you to constantly be watching your future projected finances. I built a spreadsheet with a variety of tabs to track different pieces of my finances: A summary that blends everything together and shows me running balance information, Income, Recurring Expenses (things like my mortgage go here), a tab for each credit car, a tab for each vehicle (loan, insurance, and tax information laid out based on when they are due during the year along with estimated amounts), etc. At any given time, I can tell what the balance in my bank account -should- be and can verify that it’s correct simply by logging and checking.
Your finances are your responsibility. No one is going to oversee and manage them if you don’t, and unmanaged finances will never lead to any sense of financial freedom or independence. The only way your finances will get better is if you force them to. You have to stop making excuses and start making positive changes to your household financial health.
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