Budgets – who needs them anyway, right? As anyone who’s ever had more month than money will tell you – we all do.
If you’d rather listen to nails on a chalkboard than maintain a budget, you’re not alone. In fact, a 2016 survey by U.S. Bank revealed that just a little more than a third of all Americans use a tangible spending plan.
Yet, an equally revealing study by Northwestern Mutual indicates 79% of US consumers believe budgeting and good financial stewardship go hand in hand.
So, what gives?
The problem is if you ask the 56% of Americans who don’t use a budget why they don’t formally track their spending you’d likely hear one of two responses: 1) budgeting is too complicated or 2) it takes too much time to set up and maintain one. The good news is that managing your money doesn’t have to be complex or time-consuming.
How To Budget Like The Experts?
Here are four steps you can take to budget like the pros.
1. Know Your Numbers
Before you start budgeting, you must know your numbers. The figures you should pay attention to are your income, expenses, and surplus or deficit.
Monthly income. When recording your income, remember to use your ‘take-home’ pay; that’s your gross pay, minus any deductions.
Next, multiply that by the number of pay periods you receive in a month. Alternatively, if you’re self-employed, you’ll want to use your last three to four months of receipts to calculate your average monthly income.
Monthly expenses. If you’ve never sat down to create a budget, calculating your expenses can be eye-opening because 1) you’ve never limited your spending and 2) it’s like seeing yourself in the mirror – but through a magnifying glass. Totally your monthly expenses, start with fixed monthly expenses like rent, car note, insurance, groceries, and utilities.
Next, include your monthly subscriptions, discretionary spending, leisure expenses, etc. These would include items such as Netflix, Pandora, gym memberships, and other monthly payments. Finally, gather your credit card and bank statements and note what you generally spend on shopping, dining out, and movies.
Net surplus/deficit. Add each expense category and voila – you’ve got your average monthly spending. Don’t forget to calculate your net surplus or shortfall by subtracting your expenses from your income. If the number is negative, this means you should either cut back on spending, add more income, or both.
2. Set Your Financial Goals
Determining your personal finance goals is a matter of looking ahead. For example, are you saving for that storybook wedding, looking to get off to an early start on your child’s education?
Or maybe you want to buy a house, go back to school, or plan your retirement. Whatever your aim, setting a timeline and a target savings amount is the foundation to your personal finance objectives.
3. Put Your Budget In Writing
Now that you know how much you are earning and how much you want to save; it’s time to ‘put it in writing’. But first, you’ve got to decide where to write it down.
For instance, are you more of an MS Excel type of person, a pen and notebook guy or gal, or an all-out techie? Whichever describes you, choose the budget medium that best suits your personality. Otherwise, you may never use it.
You can set a budget for an entire year using your last twelve months of expenses or you can start a brand-new spending plan based on your target savings.
4. Supercharge Your Budget With Free Mobile Apps
If you don’t mind putting your smartphone or tablet to work, you can use mobile apps to up your budgeting game. There are many apps to help plan your budget.
While most are free, some require a small monthly fee, annual subscription, or one-off purchases. Apps like EveryDollar, YNAB, and Truebill are a few that come to mind.
Furthermore, some of these apps help you by tracking your expenses, while others analyze your spending, and trigger warning notifications when you overspend!
Now that you know what it takes to budget just like the professionals, the rest is up to you. Oh, and when your savings account balance hits seven-figures, do me a favour and remember your humble personal finance writer. 😊