I was looking through my old posts, and realized that, while I mention budgeting pretty frequently, I’ve not really put anything up about successfully creating a budget that works for you. Considering that this is the most common promoter of fear and self-doubt, I figured it’s about time we talk about it!
Everyone should do this, whether they have a comfortable level of income or not. The reason being that the average American spends 102% of their income, which is, at minimum, 2% too much.
So the goal of this post is to be a one-stop overview for how to do this successfully.
Create a Break-Even
Don’t even look at your income for this step. It’s not important here. What is important is knowing how much money you actually need to survive.
1. Look At Life
This category is made up of the bare necessities. The things that you absolutely need to function as a person, along with the things you are responsible for.
How much do you spend on the following: Rent, Utilities, Cell Phone, Internet, Pets, Kids, etc.
2. The Variables
These are the items you still need, but have a little flexibility in. Groceries fall into this category, because at the end of the day you need to eat. But do you need to spend $100 on groceries for yourself every week?
I include the following in this category: Groceries, City/Fun, Gas, Tolls, Classes, Meditation, Gym, Lunch Out.
3. The Bills
We have to pay these if we want to stay out of legal trouble.
Since I do intend to stay on the right side of the law, I make sure these things get taken care of: Credit Cards, Student Loans, etc.
ALWAYS Pay Yourself First! This is number four on the list because you should use the previous three as a guideline, but look at this as a bill and pay it before you pay anything else.
At a bare minimum, include 15% of the above total as your savings every month. If you can, put in 25%, so for every 4 months that go by, you’ve put away enough for yourself to survive a month without working.
This money should go into a separate account. If you are the person that if you see it, you will spend it, then put it at a separate bank and set up automatic payments. Do WHATEVER YOU HAVE TO in order to adhere to this step.
5. The Extras
These are the things you don’t really need, but want. They are also the things that get cut first when times are tough.
I include: Netflix and Shopping. There are a bunch of things that fit in this group though, these just happen to be my vices.
Compare to Your Income
Once you have an out-line of a break even, figure out how much you need each month. I consider this from both before and after taxes (in NYC add 30% for quick math).
If your take-home per month equals at least your break-even, you are in good shape. If it doesn’t, you’ve still got work to do.
First, Trim the Fat
How many extra’s do you have? Do you need them? If I really need to cut some spending, I don’t need a $200 shopping budget for little things. I also don’t need Netflix, though I enjoy it.
Then look at your variables – I used to buy brand name items all the time. But generic brands work just as well and are often half the price.
You can also save some money by bringing your lunch a couple of days a week instead of eating out.
There are lots of options; figure out what works for you.
Adjust Your Income
Trimming the fat might just be a temporary solution while you look for an alternative source of income. Some people choose to work multiple jobs, take on overtime, whatever.
Others will look for a job that pays more in line with their spending.
Both options hold water, just figure out what works best for you.
Take It A Few Steps Further
Once you figure out what your costs are each month, take any extra money you find yourself in possession of and add that to your savings as well. It will never hurt you to have a nest-egg hidden away.
I often use mine to pay of chunks of debt. I’ll save up to a specific goal, and then use 1/2 to make a large payment. Overall, this lowers your break-even considerably.
Make the Commitment
Whatever you end up with, make sure it is something you can reasonably commit to. I know for myself that if I don’t budget any shopping money, I will break and spend a huge chunk at once when I don’t really need to.
Ask yourself, “How on-board am I with this plan?” and “Will I really follow through?” If the answer is yes, you are golden.