The Basic Steps to Setting up a Realistic Budget
Setting up a budget is so easy. Following a budget is where it gets hard, but if you keep your budget realistic then you have a much better chance at succeeding. There are a few tips and tricks that I use to end up saving money without even realizing that I’m doing it. Today I’m going to let you in on my secrets.
Step 1: Determine your income
If you work a consistent schedule each week, this step is very easy. If your schedule changes or you are not paid for time off then it is a little more complicated. Always round down, your budget should be set on your minimum guaranteed income each month. For example, in my last job I was offered an on-call role in addition to my full time employment, on-call was a stipend of a few hundred dollars for being on call for the week, but I was only paid if I was actually on call. While I was participating there were four of us that rotated being on call. So even though the income was pretty consistent each month I did not count this into my budget because it was not guaranteed. I was also eligible for bonuses ranging from $100- $400. Bonuses are also not guaranteed, this income was also not counted. Any income above and beyond expectation goes to savings or goes directly towards paying off debt. Now here’s a tip that should apply to almost everyone with consistent income: base your budget on a four week month. This means for those of you paid bi-weekly, two paychecks; and those paid weekly, four paychecks. Trust me on this one. This number should be post-tax and deductions.
Step 2: List monthly expenses
List all of your recurring expenses and bills, including but not limited to: mortgage/rent, all utilities, insurance, car payment, credit card payments, student loan payments or any other regular expense. I would suggest including your savings in this step. After you know what you can afford to save, take it out before you spend. There are two ways to do this, either list each month and the expenses that occur in that month since some bills do not come every month or divide the quarterly, semi-annual and annual expenses by 3, 6, and 12 respectively and apply that portion to each month. For the most part, this is personal preference. I prefer the latter but as long as you are planning for the expenses, you should be fine. In some cases you may even want to create a separate checking or savings account for these type of expenses so that it can build up and you will be ready to write the check when the bill arrives.
Step 3: Math
I know, I know. Its not hard math at least. Subtract your recurring monthly expenses from your four week income. Note: This number should never ever ever be a negative number. If you have gotten a negative number, you need to re-evaluate your bills and live within your means. This amount is what you have leftover to live on and buy things throughout the month. Divide this by 4. That is how much you have every week. If you prefer to work with a monthly cash budget then take the original number, if you prefer to work with a bi-weekly amount then divide the original number by 2. I am paid weekly so I prefer operating on a weekly budget. Luckily my husband also prefers the weekly method even though he is paid bi-weekly, this saves us a lot of confusion because our finances rely on each other.
Step 4: Spending money
I say “spending money” with hesitation. Notice how we haven’t mentioned certain necessities, like you know, groceries and gas. My husband and I approach this step differently, in the above steps everything is split fairly evenly but our “spending money” is what is leftover out of our paychecks and goes to separate accounts. This is where we put any inconsistent expenses. Gas prices and grocery sales are always changing so its hard to say how much we spend each month in these categories. I allow for $50 per week for gas and groceries and anything after that is spending money. He allows for $90; $40 for gas and $50 for groceries and anything that is leftover is his spending money. It is rare that we spend $50 each at the grocery each week. Our average is $35 each (food, household products, dog and cat food, etc.) so I tuck away my $15 for gas and he adds his $15 to his spending money for the week.
Step 5: Re-evaluate
Any good plan should be open to suggestion and flexible with change. As you go through life, your needs and wants change. Hopefully, your payments on debt are disappearing and your savings is increasing. Set a budget and if you are struggling with some part of it, determine if it is a lack of will power or needing adjustment in the budget. We have managed to get to a comfortable budget that works for us because we have tried others and found what did not work for us. While I hope this is helpful for anyone that took the time to read it, we all think and operate differently. So as you find ways that don’t work, go back to step 1 and start over and make changes as needed.
Wait. What about those glorious months with an extra paycheck? Well first subtract any tricky places that have caught on that they can get an extra monthly payment from you if the charge goes through bi-weekly instead of monthly (two months per year will have an extra charge) or adjust accordingly for any weekly expense (four months per year). My gym membership charged bi-weekly so I was essentially paying for 13 months per year when you look at it that way.
However, this “tricky” method can be used for good instead of evil. When I bought my first car, I chose to have the (half) payments automatically withdrawn bi-weekly. I did this so I could pay the loan off faster without feeling like my budget was too tight. I would advise that you use this trick for paying down rolling debt i.e. credit cards carrying a balance, student loans, car loan, or mortgage. Maybe not all of them at once unless you are very ambitious, or maybe just the one you are aggressively attacking to pay it off ASAP. Take the amount from step 4 for your weekly living expenses. Subtract that from the amount you have leftover after any bi-weekly payments have come out of your “extra check.” For example, for someone that makes $500 per week after taxes but has a gym membership of $15 every other week and has spending money of $135 per week (500-15-135=350) $350 left over. For bi-weekly with the same budget it would look like this: 1000- 30-270=700 since there will be a five week month at some point where you will not get an extra paycheck. You can either trick yourself into saving this few hundred dollars a few times per year OR use it to pay down debt. I would strongly recommend putting this money towards debt, From this example, that would be an extra $1400 per year without even noticing just because you set up your budget on the four week month instead of what your income works out to evenly each month (4.3 times weekly paycheck, 2.15 times a bi-weekly paycheck). Putting this extra money towards a car loan could allow you to pay it off more than a year sooner and save about $700 in interest over the course of the loan (based on a 60-month loan of $20,000 at 5%). Of course any time you end up under budget in a category like gas or groceries you can always put that towards debt or you can consider extra payments towards debt a line item from step 2 to help reduce debt even faster.
What ways have you used to trick yourself into saving extra money or applying more to your debt? Have you tried and failed with budgeting before? What advice do you have for anyone new to budgeting?