A Beginner’s Guide to Creating an Effective Budget
To those who live by financially sound principles, the idea that someone could not know how to create a budget just seems crazy. That is, until their kids grow up and begin the traditional bi-weekly call for more money. For young people, budgeting is a strange concept that was something useful only for Mom and Dad– not for them.
Those who are just starting out on their own generally have no experience with budgeting and no idea where to begin. If you or your young adult child has finally realized that the balance on your cards must eventually be paid back, this article may be for you.
Or maybe you feel as though your current budgeting system could be more efficient or effective, or you even want to create a new system from scratch. Either way, those who are inexperienced in budgeting quickly find that saving money is much easier said than done.
The first step in creating a budget is finding out where your money is currently going. If you are unsure about your current spending habits, go over your bank and credit card statements over the last two or three months, in addition to any recurring bills you have. You need to have a sense of your current expenses and expenditures to find where money could be saved.
When you know where your money has been going, you can enter the information into an Excel spreadsheet. Separate the types of expenses between recurring and non-recurring. Your non-recurring expenses are likely to be the first place to look for expense cutting, but for now, we are just reviewing your current situation. Once you have input all of your current expenses, add them up to see your monthly outgoing expenditure.
On a different sheet, create a similar input system for your income. The easiest way to order your income system is according to date, entering the first paycheck you receive in the month, then the next and any additional income you may have. Ideally, your income total will well exceed your expenditures, but don’t freak out just yet if the two are too close for comfort.
Having a tangible format for your current monthly income and expenditure will not only give you a better sense of where your money goes; it also gives you a useful tool for making changes and sticking to them. To make some immediate changes, start with the non-recurring expenses that are clearly unnecessary luxuries.
Chances are, you can also cut costs within your recurring expenses as well. Does your family have subscriptions to Netflix, Hulu, Amazon Prime, and 500 cable channels, yet you spend most of your time watching DVDs or shows on basic cable?
But all of your changes should be gradual, and it is critical you do not make too many changes all at once. This can create a shock to your family’s lifestyle that causes you to make mistakes on future budgets or give up on the whole idea. Try getting rid of one or two things a month– starting with things that will not even be noticed and gradually moving to bigger changes.
Studies have shown that before the housing market crashed in 2006, Americans spent more than they earned in the last quarter of 2005. For every dollar made, there were zero dollars going into a savings account. Times have changed, and although our economy has bounced back in many ways, it did provide a great lesson to the average person about saving money.
Although it may seem counter intuitive at first, it is important to take saving gradually as well. If you are currently not saving any specified amount, begin by putting away 10% of all of your income into a savings account. In “The Richest Man in Babylon,” visionary George S. Clason taught us that most people will barely notice a 10% reduction in their expenditures, and that amount will add up significantly over time.
When you simplify things, saving money and cutting expenditures is the best way to be sound financially. No matter how much you make, you can greatly improve your position with proper planning, saving and positive spending habits.