The first step to financial independence is knowing where your money is going every month. While you may be able to get by without budgeting, you will not be able to maximize your income and savings. With something that is so important one would think that everyone would have a solid hold on their finances. However, according to U.S. Bank, only 41% of American households follow a budget. That means that there well over half of the population is flying by the seat of their wallets every month. To improve this statistic, I have put together a list of 6 steps to creating a budget you can stick to.
Why you should create a budget
You should be creating a budget in order to live your best life. Unfortunately, budgets have really gotten a bad rap. When most people think of budgeting, they imagine spending hours pouring over spreadsheets and not being able to have much fun. The truth of the matter is that budgets are not just about restrictions. They are roadmaps for your income. One way to change the way you think about budgets is by changing the implied purpose from deprivation to abundance. With that in mind, I recommend to my clients that they think of budgets as money organizers.
The first step to creating a budget that you will stick to is by thinking about the life that you would like to build for yourself. Think about how much debt you want to pay off, how many vacations you’d like to take per year, how many activities your children can participate in, and how often you want to get your favorite latte or manicure. Once you have organized your money based on your life goals, it becomes much easier to stick to the plan. Without your goals firmly in mind, it becomes exponentially difficult to stick to your budget when a FOMO kicks in or a great sale pops up.
How will you manage your budget
Once you have determined the way you want to live your life you need to choose the best method for maintaining your budget. This part can be a bit tricky to narrow down because there are so many options out there to choose from. You can go with a printed budget planner, Excel spreadsheet, online budgeting software (both free and subscription), or a combination of these.
There really is no right or wrong way to manage your budget. The key is finding the method that works best for your personality. A planner or notebook would be best for you if you prefer to manually write down all of your transactions each pay period. Excel would be a better fit if you prefer to have your transactions calculated for you. While you do have to manually enter the transactions you have more control over what is entered. Many banks and credit card companies do provide the ability to export your transactions in excel format so if you are slightly tech savvy you can import transactions to reduce manual entries.
Online budgeting apps provide the ability to connect your financial accounts and have each transaction automatically updated. These are not set them and forget them programs. You have to manage them and make sure that transactions are categorized correctly. This method provides a bit more flexibility and visibility from anywhere you have access to the app or website.
Mapping your finances
With your tracking method firmly in place you will now be able to list your income. Review how much money you earned the previous month from all sources. Income would include paychecks from all jobs and side hustles, any child support or alimony payments you receive, retirement or dividend payments received, as well as bonuses or other irregular income. Add all of these up and this becomes the amount of money you can expect to have available to spend the next month.
Expenses are things that you spend your money on. Some common monthly expenses are as follows: rent/mortgage payments, car payments, child care, credit card payments, clothing, activity fees, subscriptions, utilities, child support, alimony, and personal care. Review your bank and credit card statements from the previous month to make sure that you don’t miss any expenses. Once you have your list, add up all expenses and subtract the total from your monthly income total. If you get a positive number, then you can look into adding more money to your savings or retirement. If you have a negative amount, then you have to determine what expenses you need to reduce or think of ways to add additional income.
Track when payments are due
Keeping track of your due dates is critical to maintaining a stress-free budget. Nothing is more aggravating then realizing that you have missed a payment. Or worse, having an automatic payment post to your account because you forgot about it. The best way to keep this from happening is by listing the due dates in your preferred budgeting method. Having this information listed as part of your budget will keep you ahead of what is due. You will also have the ability to schedule the payments based on your payday as well. Most companies give you the ability to move your due dates and I highly recommend organizing your due dates based on your paycheck frequency. No matter what budget tracking method your choose, make sure there is a place for you to track your bills by the date each month.
Review your budget often
The last step to sticking to your budget is reviewing it. The best way to make sure that you are progressing towards your financial goals is by reviewing your plan often. Once you have created your budget these checkups should take about 30 minutes. I recommend that you have four set budgeting check-ins each month. The first touchpoint would be the first day of the month. This is when you review your financial goals for the month that may fall outside of the standard budget. Events, birthdays, travel, or irregular expenses would need to be added for that month.
The second and third check-ins would be on or before your paycheck is deposited into your account. This is when you map out where your money will be going and what may be left over. The last check-in of the month is held the last day of the month in order to review what worked or didn’t work for your finances that month. This is where you can course correct your spending if you went over or under your budget as you laid it out for yourself at the beginning of the month.
What is next
By completing the above steps you will have a well-organized budget that you will be more likely to stick to. The good thing about budgeting is that it is not a static thing. You have the freedom and flexibility to change your budget as your goals change. It is not uncommon for budgets to vary wildly from month to month or season to season. This variety is common and should be expected. Focusng on yourlife goals and being willing to pivot as needed, will almost guarantee that you stick to your budget.