This is the most critical step to understanding your financial position. It is key to all other discussions about saving, retirement, spending habits, and philanthropy. Sit down with a copy of your recent paystubs the past month and statements from all your checking and credit card accounts. Add up the cash that was deposited into your account and see how that compares to what you spent. Hopefully you spent less than what you earned! If not, your in trouble if you continue that trend!
Typically income is fairly steady and predictable if you have a salary or fixed hourly job. Where it becomes more challenging is when you earn commissions, overtime pay, or have contract work. If you have a fluctuating income take a look at the base pay and start with that for setting your monthly budget. By doing this you can allocate all your bonus, commission, or overtime pay to something exciting and special that month, like paying down debt or savings!! 🙂 ….or taking your family out for a nice dinner, going on a trip, doing house projects, etc.
The hardest part for most people is getting control of their spending. I’ve noticed my bank now offers a spending report for my credit card. It breaks down purchases into categories like food, auto, shopping, mortgage, education, etc. Other tools available to use are Mint, Personal Capital, You Need A Budget (YNAB), and EveryDollar, just to name a few. Mint and Personal Capital are completely free to use, and I would recommend both to start. After all, your trying to cut expenses…
There are plenty of blogs to read elsewhere that recommend spending levels as a percentage of your income. These may serve as a great sanity check but are by no means what you need to adhere too. The trick is keeping the sum of all spending and saving percentages equal to 100%. This is one time giving it 110% is not the right approach!! My thought is that your spending aligns with your priorities. If your priority is to drive a really nice car, then you’ll need to make sacrifices elsewhere and not eat out or live in a cheaper home. No matter what your income is, you can’t have it all! As your income increases your standard of “nice enough” will also increase, thereby costing more! Working that 60k job you may dream of just getting rid of that college beater car you have, but in 20 years if you are fortunate enough to have a six figure salary you may be dreaming of replacing your BMW with a Porsche or Bentley. I think you get the idea.
So where to begin? Start be creating a job for every single dollar you earn. In other words, dedicate it to a purpose. For example, if you make $3,000 every month you know that month you need to eat (Food), get to and from work (Auto/Transportation), have a place to sleep at night (Housing), and make any debt payments you may have (Loans). Those are your bare essentials, the “must-haves”. Everything after that are “nice-to-haves”, such as a cell phone, internet, traveling the world, Starbucks latte, you get the idea. This is the exercise I like to call “How frugal can I be, if I had to be”.
Now you have a plan, great! In a half a month from now, you will review this plan and realize you over spent in some areas. Yikes! Well now it is time to make sacrifices and realize you can’t have it all. The amount you overspent in areas, NEEDS to be removed from other budget categories. There is no way around it. If you don’t you will spend more money than you made and you will go into debt. It is simple mathematics my friend. This WILL BE painful. Sometime it is so painful it may curb your spending habits! This is the result we want to see. By having control over your money, you are not a victim to the culture yelling at us constantly to buy, Buy, BUY!!, but rather you will be saving and spending your money in alignment with your true worthwhile passions!
Check out this article from EveryDollar on getting started budgeting your first 3 months! https://www.everydollar.com/blog/budgeting-what-to-expect
As always reach out with any specific questions! There are tons of great resources out there on budgeting! I am just merely trying to provide some Perspective on why budgeting is so important.
J L Collins: http://jlcollinsnh.com/about/