Sounds a lot of work to do to create a budget, but if you have a good understanding on steps to create a budget and are given a right tool, it is something you can easily learn very fast that benefits you lifetime.
So how to make a budget? More importantly, how to make sure that we can best strike a balance between our savings and lifestyle?
Here are 5 easy steps to create your budget plan and still feel satisfied about your lifestyle. Follow these steps can help you to get rid of your debt while meeting your needs for life you desired.
I have built a budget calculator that is free to use. The benefit of this budget calculator is that it already listed all of them for you to make inputs, so you don’t forget them. I also included a Mortgage Calculator for you in case of need.
Know your monthly incomes.
This is a take home, after tax, paycheck you and your spouse bring home. In another word, it should be no string attached. It is only subject to your control in terms of how to spend it. Typical income streams are:
Paychecks from your main jobs: this is your primary income source if you depend on your main job to pay for your day to day expenses
Child support and/or spousal support, if any
Social security payments
Dividend incomes distributed regularly that you rely on to pay for your living expenses
What about net income from your side hustles?
it can be a blog, a rental property, a online shop etc. Whether you should include into your monthly incomes is depending on where you see your business will be going.
If you see it as a subsidy of your main income for long time, then it should be included into your monthly incomes after netting out all expenses and tax.
However, if you see yourself to be in side hustles only for a short period of time and then eventually want to grow them into a main hustle, I recommend you to treat them as an investment that warrants its only budgeting process.
List all expenses.
Expenses is your day to day spend including food, gas, rent, insurance etc. It also should include child and pet expenses.
One important finding in the process of making a budget is that you can discover the expense that you did not pay attention to. It helps to know where we spend our money and if we spend them in the areas we prioritize our lives. Use my free budget calculator that already list majority of the expense items to help you make this process painless.
This is where we want an optimized balance between spending and lifestyle.
Some believe there should be a rule in terms of where you can spend, i.e. minimal clothing and beauty etc. because they are considered as non-necessities. Some would recommend a frugal lifestyle to find almost anything free to substitute the spend, i.e. cancel the gym membership, instead, run or bike outside.
I don’t believe in “one budget fits all” principal because we need to balance it with the lifestyle that we think important to have or even potentially can bring in more incomes for us.
Let me give you an example.
I am blessed with two beautiful children. To build a great memories at the different ages with them and provide a joyful childhood have been an important priority for me. There are many ways you don’t need to spend much to create memories, reading a story, cook a home meal or even taking a walk. However, there is nothing comparing to when we travel to a different place and enjoy the culture and sightseeing. It opened eyes to what this world can offer and the memories created are long lasting. Since I am a single mother, to have a safe, convenient place to stay is a choice I normally make to best enjoy the travel experience. So obviously travel is a significant part of my budget.
Similarly If you are an entertainer, you will have to budget beauty and clothing.
Priority in our spending is different because it depends on many things in life, occupation, family, health, belief… Therefore, budgeting should be for you and your life, not a “one size fits all” format.
Make sure to list all debts.
Credit card debt, personal loan, student loan, mortgage, medical bill installments… Make sure you count them. In my budget calculator you will notice all the debts are marked red color, because if you read my blogs in the past, by now you should know I don’t believe in debts. It is something we should work hard to get rid of, including mortgage. Read my two blogs:
Now we have income and expense items, how to best balance the spend needs and budget?
A few simple steps can help to bring some clarity.
Write down a list of the things you want to spend on.
Make a list of the things you need to spend money on.
Group them into “must do”, “great to do” and “love to do” lists. This is your priority spending lists. It would be nice if we can do everything on the list, but in reality most of us have to be conscious on where we spend and make trade offs as we plan.
Calculate the needs from each list.
Calculate how much you need to repay your debt
Compare to your income and see where you need to stop
Below are the orders to plan your spending (1 being highest priority and 8 being least priority):
Must do: including food, water, utility, rent, child care, insurance etc. You get it, basically anything you can’t live without. I meant by saying “live” like in the sense of “alive” and “job security to allow income coming”
Monthly payments on all debts: all sort of debts included.
Up to 20 percent of “great to do” expense. This includes children’s key education expense, your hair cut (although cut in half either by timing or find another barber etc.)
Principal repayments except mortgage: you should devote every penny at this point towards your debts until you pay it off including car loans
Up to another 30% of “great to do” expense. Mini travel, eat out once etc.
Mortgage principal repayment: pay extra on your mortgage to ensure you accelerate the life of mortgage.
The rest of 50 percent “great to do” expenses.
Love to do expenses.
Follow this order and see where your income stops you. if it stops you at number 3, then you want to think about if you should change 20 percent of “great to do” expense to 10 percent to allow number 4 kicks in. The rule of thumb is that debts are high priority on your spend.
You might notice that I don’t have emergency fund here. If you are wondering why emergency fund is not included, you can read my blog Why “Emergency Fund” Is Not A Good Idea?
Tracking to your budget
Now you have a budget plan to go with, don’t stop there. Things happens and sometimes there is expense we did not expect. Track your major spend throughout the month. (please note, I said major spend, it is ok if you accidentally sipped on one more glass of wine once a while).
Looking back to what you have spent can be a proud moment if you stick to your plan because you not only had a great saving built up, but remember how you make that priority list, if you follow the list, it means you have had the best experience that fits to your lifestyle. You should feel satisfied.
If in case that you could not stick to it, by looking back it will provide those reminding moments to stop you from slipping further.
Budget can be done and it is not about sacrifice. It is not about numbers, it is about how to prioritize your happiness. When you spend on things that are truly on your high priority list, you are not far from building a strong wealth.
Now your have a great budget planned and tool to keep track to it. The steps you follow here will soon turn into tangible benefit to you. Less debt, less stress, taking care of priority in life and save for bigger and better future.
Simple Wealth For Women is a blogging website focusing on financial discussions. I help women to crush debt, learn how to invest and make more money. I show you simple approach and provide you with specific ideas to help you get to financial freedom and build an amazing life.
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