Making a personal budget: How to begin?
The very first step in the process of putting our finances in order and starting to save money is usually the most daunting, for the vast majority of saving plans and advice lists start out the same: Make a budget.
But most of us don’t have a clue how to. Sure, the basics of adding up income and subtracting expenses and hoping the resulting number isn’t in the red are known by everyone. But if you’ve ever tried to sit down and actually do it, you’ll find out it’s a bit more complicated than it seems, particularly on the “expenses” side of the equation.
To help you with this, here’s a list of steps you might want to go through during this short, but oddly difficult, task.
Add up all income sources
This is the easier part, at least usually. How much are you paid a month, after tax? If you receive a monthly salary, that’s easy to calculate since it’s literally that number. Even if you work several jobs, if they pay regular amounts of money in regular amounts of time, you’re set.
Things get a bit more difficult if you don’t, however, or if you have external sources of income. It can be difficult to know how much you make in a month if the amount varies wildly, or if your income is irregular.
In this case, you might want to go back through your finances and try to find an average. If you want an even better average, eliminate both the highest and lowest incomes during the last year, then average the 10 remaining ones. Or if you want to be on the absolutely safe side, assume the lowest income you had last year will be your standard for budgeting purposes.
Create a list of fixed, permanent expenses
Atop this list you should naturally put your rent, if you’re a tenant, or your mortgage if you’re paying one. Then you should go for fixed monthly payments: Your internet and phone services, for example, might be charging you a flat fee. Same with TV subscriptions. Transportation can also apply here, particularly if you use public transportation and pay for week-long or month-long tickets for a set fee.
Other expenses that might not be as important, but still recurrent and fixed, should be put here too. A gym membership? Add it. Amazon Prime monthly fee? Put it there. Netflix subscription? You know what to do.
In other words, any expenses you can perfectly predict should be a part of this step.
For non-fixed price services, look for an average or adapt each month
You naturally don’t spend the same amount of money for heating in June as you do in January. Power usage tends to spike over the holidays, as do food expenses. You might find you use more running water during spring and summer than fall and winter, particularly if you have a garden. Gas costs can vary too – for example, if you have kids you might be spending more gas during school months than during non-school months.
Don’t stress too much over these. If you can, look at your bank statements for the previous year, or your service invoices, and calculate how much you can expect to spend over the next month based on that.
Add up regular expenses that are estimates
Food is the first one here. Medications you might regularly use, like allergy medications or analgesics, should also go here. Then, add the non-vital ones, like entertainment and eating out. If you’re a smoker or a heavy drinker, try to gauge how much you spend a month in it and put it here. Then use that number to potentially convince yourself to kick the habit.
In this step, it’s a good idea to add an extra, virtually nonexistent category for “emergency expenses,” particularly if you don’t have an emergency fund. These expenses are surprise ones that could pop up and potentially derail your budget – it can be a broken appliance that has to be repaired, needing to purchase a new pair of shoes, or even having to get medication to treat a cold. If you don’t end up spending this money at the end of the month, do the wise thing and save it. That way you’ll be one step ahead in your path towards having some money saved.
Add it all up, and hope it adds up
As in, hope the result of income minus expenses isn’t in the red.
If it is, use it as a wake-up call: You can’t go on spending more than you make for long. Look at the list of expenses and figure out which ones you don’t really need, or which ones are overbudgeted. Could you do with a cheaper phone plan? Slower internet? Are you really using your subscriptions to Netflix, HBO, and Disney+, or could you cut two of them and rotate the one you have active?
Even if you’re not in the red, now that you have a proper list you should consider cutting some non-vital items from the list – after all, that’s the point of making a budget: Figuring out what you can do to save money.
A note on impulse buys and small expenses
It’s hard to get an exact number for the money we spend, because a portion of it we don’t even notice. Small expenses, like getting yourself a cinnamon roll at the cafeteria or buying a kindle book you see on sale, after all, are hard to keep track of.
So the first month, use an estimate. And for the second month, keep track of each of these expenses. Find out how much money goes to unlisted expenses, and if the amount is too high make it your priority to either properly budget for them or eliminate them.
Remember that making a budget isn’t necessarily about sticking to it completely – but about keeping track of where your money is going, and why. The most important part of the budget is to make sure you aren’t wasting your money, while at the same time helping you make sure you’ll make it alive (and ideally with some money saved) to the end of the month.
You’ve lived this long without sticking to a budget. Don’t stress too much if it takes you a month or two to get one right.