Setting up a personal budget is a very smart thing to do. Cash control is not easy if you don’t follow a plan. A budget plan is simply a road map to show exactly how you will spend your money each month. Starting up a budget is free plus it can help you reach goals for your additional needs or desires. Making a road map for your cash each month is critical for being financially free.
How do I set up a budget for my money?
Creating a custom budget is free and easy to do. The hard part is sticking to it. After a week it is easy to forget to put an item you bought on your budget worksheet. This is where you will have to push yourself to make sure you keep an accurate record.
Step 1 on How to Budget Money
Do you even know how much money you bring home each month?
Have you looked at your paycheck in the past month?
Most people don’t because we no longer get actual paper checks. Checks are electronically deposited and usually, all we do is log onto our bank accounts to see if it got deposited. That is sad! It is crazy that most people don’t watch their money. They spend all this time making the CEO’s and owners richer but don’t follow their own money. If you want to be financially free you have to know that you’re getting paid correctly. You need to see how much is coming out of your check for taxes, insurance, 401k’s and other deductions. The first step in budgeting is to look at the amount you earned that month before any deductions. Then look at what actually got put in your bank account.
Now write down what you bring home per paycheck. Some of you will be paid weekly, bi-weekly or monthly.
People in sales will want to keep a running average. Look back on the past 12 months and average. Then look for the lowest month and that is the number you need to set your budget too.
Get your yearly actual bring home pay by taking the amount deposited into your bank account times the number of checks you receive in a year. So if you get paid weekly that is 52. Paid Bi-weekly that is 26 and if you’re paid twice a month multiply you bring home pay by 24.
The final step is to take the yearly total of what you’re paid and divide by 52 weeks. Then take this number and divide by 40. This is your true take-home pay per hour. I want you to think about this number. Don’t forget it!
For example, let’s say your take-home pay is $1,100 and you get paid every two weeks. This is the amount that is deposited into your checking account.
$1,100 x 26 = $28,600 this is what you actually get to put in your pocket each year.
$28,600/52 = $550 bring home pay each week
$550/40 = $13.75 is what you earn per hour after taxes and other deductions
$28,600/12 = $2,383 is the amount your monthly budget will be calculated from.
Step 2 on How to Budget Money
Get all the monthly bills together. Right now review each bill.
Once you have each bill ask yourself:
Can I do without this?
How often do I use this service?
Is this worth having enough to slow my way to financial freedom?
Now I want you to take each of these monthly bills and divide it by the per hour rate we figured out above.
For example: Cable TV bill $65 – take $65 and divide it by $13.75 = 4.72 hours
Is cable TV worth 4.72 hours of your life each month to pay for it?
Do this for all your monthly bills. Hopefully, you think real hard about that service and if it is worth trading that many hours of your life for each month. Month in and month out over the year Cable TV in the above example will cost you 56.72 hours of your life. About 2.37 days of your life just to pay for channels you never watch.
List of possible monthly bills you have:
- Cable TV
- Cell Phone Bill
- Gym Membership
- Car Payment
- Student Loans
- Current Credit Card Bills
- Car Insurance
Some people will have additional bills but this should get you rolling. Make sure to watch your credit card statements for monthly charges you might have forgotten. Companies like automatic bill pay because people tend to forget about them. It’s easy to forget when they are billed with other bills you might not even notice them.
Review all bills as they come in, credit card statements and checking account ledgers. Watch the statements closely to see how much money you spend on given items in a month.
Add non-bill expenses to your bill list. Anything you spend cash or use a credit card for should be added to this list. Including groceries, gas, gum, and the occasional morning latte needs to be jotted down. List each item and write down the cost of each purchase.
Now the tedious expenses you have from day to day to record can be a real pain to do. Pick a time and do this each day. Make sure you don’t leave anything out. Day to day spending on coffee, fast food, and groceries, isn’t always apparent until you start adding up all the purchases. This is all part of having a workable personal budget; you must have some idea of how much money you spend on day to day items.
I know lots of people who say oh it’s just a dollar or oh its just $5 dollars. These dollars add up quickly. That is the reason you need to record everything to see where your money is disappearing too.
Pool related items in your expense list into groupsets. The morning coffee can be added to the burger expenses for lunch under a more general “Dining Out” category for example.
As the month goes on keep a running total of:
- Eating out (Fast Food and Sit Down)
- Anything else try to group it
If there is a problem we can break these general groups down at a later time. Diving to deep right now and making too many budget categories will drive you insane.
Step 3 on How to Budget Money
Subtract your recurring monthly bills (sewer, water, electric, gas) from the total bring home dollar amount. Then subtract what you usually spend in the other categories. If you’re in the red or have very little money left over then you going to have to try and cut something out. You need leftover money to cover those other expenses plus to put money away in savings.
Again bring home dollar amount is the actual amount that gets deposited. Not the inflated number before deductions.
Step 4 on How to Budget Money
Review your list of bills again and combine any categories and totals you may have missed previously.
Then take your monthly bring home pay amount and divide it out per category. Plus make sure to put the amount you’re saving away (we will talk about investing this money or using it to pay down debts in a later article). This has been called money envelopes. Basically what you do is put the allotted amount of cash in each envelope. As the month goes on and you spend, you take out that money from the envelope that it is tied to. Track your spending from this point on. Make every effort to not overspend what is allotted to each category.
If your expenses are more than your income then you need to start cutting back. Try taking a small amount of money from each category you’re able to until you start showing money left over. It’s easier to subtract $5 from four categories than it is to subtract $50 from one. By spreading the reductions out over more than one area it will make it easier for you to stick to.
One thing you always have to keep in your mind before buying anything is your budget. Plus think about how many hours of your life you have to give up to buy that item. Is it really worth it? Can you get it on sale someplace else? We will be featuring articles on how to use your smartphone as a savings tool. You have to be aggressive if you ever want to be financially free. The budget is the first step in the correct direction.
Everybody’s definition of being financially free is different. But I want you to think about your life if you had no debt. Could you imagine not having to pay rent or a mortgage? How about no car payment? How much different would your life be without owing any debt?
If you had no debt and a year of take-home pay in savings account how different would your life be? Would you be tied to a job you hate? Just think once you get to this point you can do any job you want! Not the one you have been stuck at because you owe. Off to work, I go because I owe would be a thing of the past for you. You could go to work and enjoy it knowing if you got fired our fed up with it you have a plan in place. That is magical to me and that is being free. You don’t need millions to be free you just need a little planning.
That is what planning a budget will do for you if you take it to heart. Get started now and use our simple how to budget money guidelines.
Your budget plan is an ongoing effort. It will take a month or two to get a full grasp on it.