Before you can learn how to budget to live a debt-free life, plan for retirement, increase wealth, and accomplish your goals, there are foundational steps to make your budget more effective. Here I will talk about how to build a solid financial foundation to begin building wealth on a budget:
– Net Worth: Track Progress on Your Financial Journey and Get a Financial Overview
– Money Habits: Find Out If You Live Below, Within, or Beyond Your Means, What This Means, and How To Change This
– Budget Tracking: Create a Budget and Learn the Best Way For You to Track It
– Additional Budgeting Tips: What To Do When You Overspend and Beyond
Assess where you are and how far you go in your financial journey. Every year or so, you can use your net worth to examine how much you have improved since learning how to budget – both in wealth and/or debt-management. Similar to working out, the numbers won’t lie. Even when you feel discouraged by the number you see, you will notice that you have made progress by examining your net worth.
For this step, use Excel or manually add together all of your assets. Include your checkings, savings, investments such as stocks or mutual funds, retirement funds, and propertyies. In a separate calculation, add up all of your liabilities (aka debts) such as credit cards, student loans, car loans, and mortgage. Optionally, calculate your mortgage separately to get a progress report on your mortgage and tackle your smaller debts first.
Now, subtract your liabilities from your assets to calculate your net worth. By knowing your net worth, you know exactly where you are on your financial journey and you can make a good plan of attack to gain wealth.
You know your net worth, have a great starting point in learning how to budget, and maybe have an idea of where you want to go financially. Improve your finances further by calculating your income and expenses.
See what you make and what you spend your money to get a clear sight of where your money habits are leading you and how to change or improve them.
Take a snapshot of your typical monthly finances to learn your money habits. Make a list of monthly income and monthly expenses. For expenses, don’t forget to include yearly or biannual expenses such as car insurance (and just divide it by how many months you have in between paying the bill). Creating this simple type of budget in excel is helpful as a program adds up the numbers for you.
With a list of monthly income and expenses, you can see whether you are living below, within, or beyond your means.
-Living below your means: While you could put more of your money towards frivolous things, you decide to be frugal and put a majority of your money into savings, retirement, or investments. This can be saving anywhere from 30% or more of your income. (Our average is about 55% and we are shooting for more.)
-Living within your means: You make every dollar count, but tend to be less thrifty. While you are working towards savings, you make enough to contribute even more. Yet, you choose to indulge now, instead of having it pay off later. (I have been through this! Bills were costing me about 40% of my income, so I had a lot left over to enjoy and save, but at the end of the year, I hadn’t made any progress)
-Living beyond your means: Your income – expenses = (-). Your budget could work, but instead of putting your money towards less debt or savings, you spend more than you have and come out with less than you started.
The ideal money habit is to live below your means to build enough financial wealth to decide what you do with your time.
Living within your means is not a bad habit. It just means you could do even better. For this reason, if you are living within or beyond your means, you can improve your money habits by doing one or both of the following:
– Decrease your expenses
– Increase your income
As a budgeteer, I love to decrease my monthly and yearly expenses as much as possible. Most often, you can save money each month by learning how to budget in general and making better financial decisions. Whether that’s choosing to meal plan instead of going out for lunch and dinner each day or lowering your utility bills, there are many ways to decrease your expenses.
As a budgeteer, I also know that decreasing expenses does not always accomplish your financial goals (paying down debt or building wealth). For this reason, I include increasing your income as an approach to changing your money habits – even if only temporarily. 3 ways to kickstart your savings has some valuable tips to increase income during your beginning stages of budgeting until your primary source of income pays for your goals.
You just discovered your money habits and some ideas have sparked in you of how you are going to improve your financial choices. Your next step is to decide where each dollar from your next paycheck goes before you spend the money.
Create your budget. Using a spreadsheet is helpful because all the math is done for you. Necessities, bills, debts, goals, and savings are included in your budget choices. For a more in-depth training on how to create a budget, including going over many ideas of what should be included in your budget, learn how to create a budget in an excel spreadsheet.
Track Your Spending
While going over your monthly finances is important, being consistent with your budget is as important as creating your budget.
Envelope Method: If you are bad with cards, technology, impulse-spending, or a combination, this may be the method for you. Once pay day comes, you will have your calculations in your spreadsheet or written budget. Withdraw the exact dollar amount of your smaller expenses, such as gas, food, or clothes. Leave your larger payments of rent or bills in your account to pay them off by check or through a website. With the exact money to apply to your envelope method, you will make envelopes with names on it and you will only use what you budgeted for from the corresponding envelope.
For example, create a gas envelope. Budget $40 for gas the next two weeks. Withdraw from the bank and put it in the envelope. Every time you go to buy gas, use it out of only this envelope.
The pros of this method are that you see the money leaving your pocket instead of swiping plastic, so it makes you more conscious of your spending. When you do this with all of your small bills like food or a clothes fund, you psychologically won’t want to see the money leave and it can help you make smarter choices.
Budget App Method: If you are looking for something that integrates into a busy lifestyle and you can control yourself with using debit or credit cards, use an app that is, essentially, the envelope method. My favorite tool for tracking my expenses is GoodBudget. Just like the envelope method, I input my paychecks and allocate every dollar, so that it is all accounted for (after making a plan in Excel). Then after I make purchases, I apply them to the right envelope in the app and I can see how much remains in the envelope. There are even applications out there that will sync up with your bank account and apply purchases to envelopes for you.
The GoodBudget app works best for me, but we are all different. Find a method that works for you and your spending habits. Be consistent with being on-purpose with your purchases.
– Budget realistically. If you spend $150 a week at the grocery store (you should probably think about lowering that), but also, put that into the budget. Don’t skimp and cause yourself to overspend later. Plan ahead.
– Did you end up overspending? No problem. Here is the fix: just take your overspending from a non-necessity category (like the new shoes fund) and apply it to the necessity that you overspent on. Work on budgeting accordingly or making better decisions your next budget round.
– Think ahead. If you get paid biweekly, think about what is happening for the next 2 weeks. Is there a superbowl party in the next two weeks that you will have to spend extra on groceries? Budget for it. Are you going to visit family and will you need extra gas money in the next two weeks? Is it a friend’s birthday in the next two weeks? Or special anniversary in the next two weeks? Budget. You get the point. Make every dollar count.
– Think way ahead. Plan for expenses that you have to pay every few years, yearly, biannually, or quarterly . For example, our DMV registration is about $125 each ($250 total, give or take). Since we will always have this expense at the end of the year, we put about $9.62 away each pay day ($250/26 pay periods a year) to make sure we have enough money for this expense. So, when it comes up, we won’t have an extra large payment taking away from other goals. Here are some expenses to think ahead on:
– DMV Registration Fees
– Taxes (Do you have to pay additional taxes on your income or for a side business?)
– Car Insurance
– Certification Courses or Continuing Education Hours for a Certification You Have
– Adventure time. If you are planning a vacation in the future (similar to thinking way ahead) or have a hobby that you want to save for, start budgeting now. We are actually going on a family trip to Hawaii in 2019 with our hotel paid for, but flight, food, and activities are on us. Since we have 2 whole years to plan, we budgeted what we wanted to spend (we like to treat ourselves on vacation) and by putting away $50 each paycheck, we are going to have our entire trip paid for. The perks: you will have the money so you don’t have to use ugly credit to pay, it doesn’t break our biweekly budgeting bank at such a low rate, and we are stress-free when we go on vacation to just enjoy ourselves.
With these tools under your belt, you will build a strong foundation for what is to come by budgeting. Next, find out how to begin building the structure of wealth. You will start small, but your structure is going to continue to grow as life continues.
What kind of budgeting tips do you use?