I want to start off by saying that, sadly, there is no one-size-fits-all approach to budgeting. People often ask me what budget template they should use, or how much they should be spending or saving. There’s no easy answer because it always depends on the individual. It depends on your current circumstances, your long-term goals, and your personality. BUT once you figure out a budget that suits you, you’ll be much better off. Let’s dig in.
1. Figure out how much you earn each month
This one can be easy, if you have a steady paycheck. All you have to do is look at your pay stubs that come each month. If you get two consistent paychecks each month, add them up and that’s your monthly income. That’s the maximum number you should reach when it comes to your expenses and spending. If you’re spending more than what is coming in, you’ll end up in debt. Ideally, you want to be spending more than a little bit less than you’re earning, so that there is money leftover to save or put towards debt.
Figuring out your monthly income can be trickier if you’re a business owner, or if you are an hourly employer. If your income varies due to these circumstances, try to figure out your average earnings. If you earn more than that some months, you can put that money towards savings or debt, but you shouldn’t budget it as typical income. That’s because if you’re budgeting for more, but you earn less, you might end up in the red.
2. Figure out how much you spend each month
This part can be a little trickier and tedious. First, I would break this into two different categories: fixed/required expenses and flex spending. Fixed spending includes everything that is generally the same each month, like rent, utilities, car insurance, student loans, etc. Flex spending is anything that you have more control over, like groceries, dining out, personal care, etc.
An easier way of doing this is to create an account with an app like ClarityMoney, Learnvest, Mint, etc. Link all of your accounts and the program will give you a breakdown of how you’ve been spending your money over time. You might have to go in and re-categorize some things, but this should give you a good idea of how much you’re spending and on what.
If you don’t want to link up to a budgeting program, you can also do this part manually. It will take longer, but it will likely give you a lot of clarity about your spending habits and where your money is actually going. I like to use Google Sheets for this kind of activity. (Don’t know where to start? Email me to get a sample budget spreadsheet!)
3. Don’t forget about non-monthly expenses
Quarterly or annual expenses can be easy to forget. And they can throw you off your budget if you aren’t prepared. So keep track of all of your non-monthly expenses. Put reminders in your calendar for right before you’ll be charged for them. This exercise might even show that there are subscriptions or other bills you should cancel. (The ClarityMoney app shows you any recurring payments that you have and gives you the option to cancel them through the app if you don’t want to use them anymore.)
If you want to be extra prepared for non-monthly expenses, set up a savings account just for them. I set aside money each month to cover things like renter’s insurance, holiday and birthday gifts, yearly subscriptions, etc. I decided to do this after I was caught off guard by the $160 renter’s insurance bill that only comes once a year. It’s not much money over the course of the year, but it can break your monthly budget if you aren’t ready for it. So, set up a savings account, and automate a monthly amount that will go into that account so that you always have enough to cover those costs.
4. Figure out how much is left over
Once you account for all of your monthly (and non-monthly) spending, what’s leftover? Is there anything leftover? Are you in the negative? If you have money leftover after paying all your bills and doing your typical flex spending, you then decide what you want to do with it. If you realize that there isn’t anything or enough leftover, you may have to make some changes. Which leads me to…
5. Identify where you can cut spending
This process won’t necessarily feel good, because you will be forced to face whether you’re overspending or not. You may realize that your money habits are not reflecting your values or your long-term goals. That’s okay! Most of us haven’t been taught how to manage our money, and we definitely haven’t been taught to align our money with what means the most to us. So, let yourself feel the bad feelings and then forgive yourself. Going through this process is the first step to getting to where you want to go, so you’re on the right track!
Once you get through that, take an honest look at where you can cut your spending. This might mean that you have to adjust your habits and lifestyle. You’ll likely have to stop going out to eat or drink as often. This might impact your relationships with your romantic partner or friends. So make sure that you talk to them about it.
This post was originally published on MaggieGermano.com and was shared with permission.
Maggie is a Certified Financial Education Instructor and financial coach for women. Her life’s mission is to give women the support and the tools that they need to take control of their money, break the taboo of discussing debt and income, and achieve their goals and dreams. She does this through one-on-one financial coaching, monthly Money Circle gatherings, and speaking engagements. Passionate about many issues affecting women, Maggie also serves on the board of Collective Action for Safe Spaces, is a member of Planned Parenthood of Metropolitan Washington’s Developing Leaders Program, and was trained as a salary negotiation facilitator by AAUW.