Today’s steps will be one of the key steps to becoming financially independent. Learning how to budget and sticking to your plan will be absolutely vital to make sure you achieve your financial goals. Although budgeting might have a negative connotation to some, from today onwards, set yourself the challenge of seeing it as the new sexy and your smart move to going where you want to get to.
Budgeting will be a continuous learning process, one you’ll have to develop, adjust and simply get on with it in order to learn this new skill. It isn’t something that you will be able to master in an hour or even a day: every month new things come up, and with time you’ll work out how good you are at predicting your expenses, how flexible your various expense categories are and how to make sure to plan ahead enough, for example for the holiday period.
When you budget, you pre-assign all your money a role for that month. You state explicitly where every single dollar you have available goes to, from the first to the last day of the month. Will you know exactly how you will be spending all your money at the start of the month? Of course not, your grocery bill might be higher or lower than expected, you might have an extra lunch out, and that present that you were going to buy ended up being a lot cheaper than you expected.
As you can see, it is indeed impossible to know precisely how much money you need for every single thing, but let’s look at some of the huge advantages of having a budget:
- It is a way to make sure you don’t live beyond your means. You know what you have available to spend, and by budgeting you make sure you don’t plan to spend a single dollar more than you have.
- If an expense turns out higher than expected, you can easily see where to take the money from, making sure you don’t go over your limit.
- If an expense is lower than planned, you can assign the money left over to a goal that you are working towards to, making sure you make the most of this extra money becoming available.
- It means you will control your spending and work towards achieving your goals by planning ahead. Instead of realizing at the end of the month that you’ve spent $200 on meals out, you can set yourself a limit ahead of time and make decisions based on your plans and financial goals. Nobody ever accidentally saved $10.000. If that is your goal you need to work out how to get that money.
So let’s get going and put your budget for next month together.
Step 17 – Budget for a month – in detail
- Pull up your log with monthly expenses.
- Write down your expected income for next month. Your goal is to not spend any more than what comes in next month, whether that is in cash, transfer, debit or credit card or any other way you might spend money. Your income is your monthly limit for your spending from now on.
- First assign your fixed expenses, make sure to check your list of these expenses and write down how much you will be spending on every single one.
- Then assign your variable expenses, as you know these ones are more difficult to predict as they are variable, but check the average that you calculated or estimated in step 10. Write this down, or if you feel it won’t be enough (e.g. you know you’ve got a higher than usual utilities bill coming up), adjust as you see fit.
- Assign your savings expenses: any debts you are repaying and / or any savings or investments you are making. Make sure to check your savings expenses register for the details.
- Check how much you have left and assign whatever you have left to your discretionary expenses. Think ahead: do you have a birthday, wedding, trip etc coming up? If so, make sure to set aside enough money to be able to pay for this.
- Be realistic: there will be some expenses you know you can’t really cut out, as you’ve committed to something already, but at the same time be incredibly strict with yourself where possible. If you don’t have money to buy a new outfit, don’t buy it, just re-use an old one and see if you can buy a new dress next time you need one. This might be the most difficult part of budgeting as it requires you to control your impulses and be sensible with your money, but hey that’s why you signed up to this mission in the first place, right? I told you it wasn’t always going to be easy.
- Stick to your budget. Whatever happens, whatever bargain you encounter or however tempted you are to buy something. Stick. To. Your. Budget.
- Unless you can move money across from one category to the other. So you see that beautiful dress at 80% discount, but you don’t have money set aside for clothes this month. You do still have $30 to spend on a hair cut. If you feel you can pull it off and leave that hair cut til next month, by all means go for it, buy that amazing dress and update your budget straight away, moving the $30 set aside for a hair cut to your clothes budget. If not, don’t buy the dress. Especially not on credit (more on that later).
- If needed look for support groups on Facebook or in your direct environment. There are lots of communities on budgeting, so become a member of them as that is a great way to lift yourself up when things are difficult and you find that your budget isn’t yet working for you. These communities are also a great way to learn more about budgeting and picking up tricks and tips.
Making a budget is a new habit that you need to develop with time. As with all new habits, there will be disappointment or frustration when you find it difficult to follow through on, but remember that your determination and persistence is what will get you there in the end, not whether or not you are perfect at it from the start. If you are struggling to stick to your plan make sure to re-read your commitment (step 1) and your financial goals (step 2) and remember that it will become easier with time.