Personal finances can get complicated. Should I invest, save, or spend? How come I only have a few bucks to spend at the end of the month? Where did all my money go?
These are all very real questions people ask on a daily, sometimes hourly basis. A monthly budget will help you answer at least some of these inquiries — and if all else, it will help you save up for that much-needed summer vacation.
To help you out, I’ll go through the basics.
Find a mode of keeping track of your spending and income: If you don’t want to invest in a personal accountant, purchase Quickbooks or some sort of accounting software. You can also get started using an excel sheet. Whatever you use, make sure you are able to alter numbers as the month progresses. Keeping a firm track of your finances, no matter how depressing, is the only way to create a successful budget.
Fixed costs: Fixed costs exist and there is nothing you can do about it. The mortgage payment, rent, insurance — all of these things need to be paid promptly and on-time, so ensure they are a priority in your budget. If using quickbooks or an excel sheet, these payments would go at the top of your list.
Varied costs: This section includes cell phone bills, groceries, Internet, and cable. You have a little more control over when you pay these items and how much they are, but know there are always consequences for late payments. This should be the second section of your budget. When doing these calculations, make sure to note interest rates for late fees so you are aware of what happens if you don’t pay on time.
These varied and fixed necessary costs should, ideally, make up half of your monthly income. This may mean you have to adjust your Internet packages or change cell phone providers for a cheaper deal.
Calculate the small things: Toiletries, groceries, your morning coffee — anything that you purchase on a monthly basis needs to be in your budget. Don’t omit anything, even if you do drink an embarrassing amount of Starbucks. The point of this exercise is to see if you can decrease your spending while still ensuring you have the necessities of life.
A key tip for these calculations is to always over-estimate: If you think you spend $50 a week on groceries, say you are going to spend $70. If you think you spend $2 a day on coffee, double it! One day, you may get a pastry with your coffee and it will screw your entire budget up. If you overestimate and you have money left over, all the better! You can either spend it or put it into your savings account. Either way, it ensures your budget is more accurate. It’s always better to have money leftover at the end of the month than realize you spent more than your allowance.
Savings/Paying off Debt: It is imperative that you include a section for savings and debt in your budget. If you don’t, you will never save any money. Decide on a monthly amount you will put into a savings account of your choice, and count that money as already spent. If you have loans or a credit card, use some of these funds to pay it parts of it off. Try to use 20 per cent of your monthly income to pay things off and save up.
Always put some money aside for “fun”: Let’s be realistic. At some point in the span of a month, you will go out to dinner with friends, see a movie, or take a day trip somewhere. If you don’t set aside some cash for entertainment, a) you may go a little insane and b) you’ll end up spending more than you’d like on a spontaneous splurge. The remaining 30 per cent of your budget can be spent on these activities, although if your priority is paying off debt, swap the numbers with your savings. The idea is to give yourself a weekly or monthly allowance to spend on fun things — that way, you don’t feel deprived, but at the same time, you don’t overspend.
Keep your receipts and actually look at them: This is the hardest habit to break. Most people try to avoid those pesky small pieces of paper in their wallet, but it really is necessary. If you use quickbooks, this will allow you to keep track of all your payments by manually inputting your spending. If you use excel, it will help you reflect on what you spent money on, and where you can cut back. Not to mention you may find a lot more deductibles come tax-filing time.
I hope this helps you create a basic budget. Remember, keep track of everything — no matter how depressing it will be. Who knows? Maybe after a few years you won’t need such an intensive system, but for now, embrace it! Think of what you will do with those savings. Will you buy a house? Go on a vacation? The possibilities are endless — but only if you budget.