If you want to get out of debt and learn how to budget, it is important to have a clear vision of where you are financially before you get started. You need to ask yourself why you want to get financially healthy. Where are you going with your money and how can a budget take you there? If you were a marathon runner, in order to run a race you need to have a starting line and a finish line. Budgeting is similar; it is not something you learn to do quickly and you have to plan and train to make it work. Today we are going to work on setting up your starting line, this way you will have something to measure your progress against and also where your finish line is.
1.) Take all your major expenses, and write them on sticky notes.
Place these sticky notes on the wall so you can see them clearly. These would be things like your housing, gas, cable, utilities, car payments, food, and insurance bills.
2.) Write out everything you are paying for every month, that would not be considered a major expense. Write these on sticky notes and put on the same wall.
These would be things like your cable bills, home phone, iPhone, clothing expenses etc. Be honest with yourself. Open up your past few months’ bank statements and really take a look at those other expenses so that you know where your money is going.
3.) Compare these expenses to your monthly income.
So far, you’ve only taken expenses into account. Compare these expenses to how much income you have coming in every month. If after doing this comparison, you have extra money left over, yet you are consistently running a deficit every month, then look again at those ‘extra’ expenses weighing you down. Your budget needs to be realistic.
4.) Go through these expenses and determine whether you can get rid of them, reduce them, or if you need to keep them.
Date nights – Think of creative ways to have a nice dinner at home. Buy steaks and affordable bottle of wine, and light some candles. You’ll end up spending $10-$15 instead of $40-$50 on your date night.
Phone and internet – You might want to get rid of your smart phone. I read a statistic about college kids who make under $10,000/year: 80% of them own smart phones that they pay for. This is a huge expense that could be so much less. Or you could opt to get rid of your home phone and just use your cell phones. One good option is to use a pre-paid phone, or a phone with a cheap monthly plan.
Insurance – We all need health insurance and home insurance. Shop for insurance every 3 years – your rate will start creeping up a couple dollars every few months and they expect you not to notice. If you want to save money here, I would recommend shopping around for insurance to get that rate down.
Clothing – We all need clothing. I have 4 kids – they grow! That should be in the budget. Think of creative ways. Shop clearance! Shop for next season at the end of this season, when things go on sale. Shop on websites like ThredUP.com where you can easily consign your kids clothing online. Go to Garage Sales.
Food – Use coupons, plan your meals. Learn how to coupon with my ‘How to Coupon Effectively‘ ebook.
Miscellaneous expenses – Most people fail at their budgets because they don’t give themselves any wiggle room. Reality is that things happen, things break, and we have to pay to replace them. I recommend giving yourself a little wiggle room, it can be as little as $100.00 per month that you can have set aside for these random expenses.
5.) Now take all of your debts and write them on sticky notes.
Place those next to your expenses. Take a look at the minimum payments of your debts and make sure that you are able to pay those minimum payments every month. If you are in a position where you are really just barely scraping by and you cannot keep up with the minimum payments, go back to the sticky notes of your expenses and see where else you can cut back. This is the painful part of this process because you may have to give up something that you don’t want to. But the goal is to really make progress on those debts – get out of credit card debt, pay the car off, pay off school loans. So even if you aren’t scraping by and have money leftover in your budget, paying debts is where it needs to be going – so consider cutting back on those other expenses. The good thing is that once you have made progress on your debts, you have the choice to add those back in. Remember – it’s not for forever!
This can be done in under an hour, and you now have your starting point. Once you have this starting point you have a clear vision for where you are financially.
At the end, you’ll be on the right track money-wise and have the know-how to continue on that path.
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