5 Steps to Make a Budget That Works
Sitting down to write your first family budget can feel overwhelming. Like you’re attacking a wall of expenses.
Facing a wild mix and match pile of costs like that, and feeling sure that you haven’t even thought of all of them, can make most normal people stop, drop their pencil, and walk away. Let me tell you, I have been there and I understand. You have my sympathy.
As a financial coach, though, I’m not going to let it end there. You have a responsibility to manage your money, and ignoring that is just going to make things worse. Walking away is not a realistic option. You need to scale that wall, climb that pile, and overcome your fears and frustrations about budgeting.
Like any problem that seems overwhelming, the answer is breaking it up into smaller steps.
Step 1: Determine Your Income. For most of the
five people reading this, that’ll be easy. A fixed, regular income is still pretty common. How many paychecks are you going to receive in the next month? Total those up, write down the number, and label it “INCOME.” Done.
If you’re one of the lucky few who receives an irregular income, this seems like more of a challenge, but you can’t skip this step. The best general advice I have is to take your worst average month’s income and use that as a baseline to budget from. If more comes in, excellent! You can put it to use in one of the next steps.
We can’t spend more than we have coming in, and we need to put every dollar to work, starting with…
Step 2: Pay for Your Necessities. Your first priority is to take care of those things that keep your household functioning. I’ve covered this ground before, in explicit detail, so I won’t spend a lot more time on it. The big point of this step, though, is to make sure that you have enough income to cover the basics, and see for yourself how much is left over once those basics are covered. In most cases, that margin way bigger than you’d think.
Step 3: List Your Goals. What is it that you want to do with your money? What’s on the top of your list? Do you want to pay off debts? Save up a cushion for emergencies? Invest for the future? Build up a college fund? Go on a huge vacation? I know the order that I’d advise you to do them in, but ultimately you get to make the decision. So, pick one.
You’ll be using the margin you have from Step 2 to fund this goal (including any unexpected irregular income), but you have one more step before you’re ready to go…
Step 4: Say “No” Everywhere You Can. That big goal, and all of those necessities, probably didn’t account for every expense in that massive wall from before. For everything that’s left, you have to ask yourself this question: “This month, is this thing more important than reaching my goal?” For a lot of items, the answer will be a frustrating “Yes.” For example, you might find that the pets get a little bitey if you don’t feed them often enough. Not to mention that your children do need new clothes now and then. And it’s really hard to say “No” to debt payments.
Still, there will be a bunch of things you can say “No” to. Like Cable TV, or eating out. Plus, it gives you the chance to take a hard look at how much you’re spending on those “Yes” items. Maybe your kid doesn’t need new school clothes from the mall. Who knows? You might even find a few ways to cut back on your necessities.
By now, you should have a budget that works for the upcoming month. Finally, you get to…
Step 5: Do It Again Next Month. There is no such thing as the perfect budget. Every month is different, and every month’s budget should reflect that. Each time you sit down with a pencil and write it out, you give yourself the opportunity to learn from mistakes and develop good spending habits.
This isn’t a one time deal. It’s a lifetime deal.
What do you think? Did I skip a step? Let me know in the comments below!
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