So, what is a budget and why do you need one? A budget is a financial roadmap. A budget allows you to see how much income you earn and how much you are spending each month. Above all a budget allows you to enjoy life in your terms without the stress and worry.
Creating a Starter Budget:
Creating a budget does not have to be as daunting as it sounds. The first thing you want to do is take inventory of your spending habits. Simply write down everything you spend money on for at least a month, preferably two months. By doing this you are able to see where your money is going. For instance, after doing this exercise you may see that you spent $100 eating out in one week. This may be something that you could cut back on if you are trying to build up your savings.
This leads into the next step which is to categorize all your spending. By doing an inventory you can see what you spent on groceries, eating out, debt payment, utilities, etc. After you have taken inventory and categorized your spending, the next step is to write down your total income for the month and your total expenses. After subtracting your expenses from your income you will be able to see whether you are in a deficit or in a surplus.
Remember it is important to list everything you spend money on. That includes hobbies, entertainment, subscriptions, etc. In other words if money is leaving your pocket for this activity then it needs to go in the budget. This exercise can also help you determine what you would rather spend your money on and what things you want to give up.
Now, I subscribe to the theory of zero-based budgeting. This means that you assign every dollar that you receive a category. This includes money that you allocate for savings and investing. So, if my total income for that month was $2,000 when I finished my budget for the month, I would have $0 left. That includes budgeting for fixed expenses (rent, utilities, debt, etc.), variable expenses (groceries, transportation, clothing, eating out, etc.) and savings and investments.
It’s as simple as that, so while it may seem that creating a budget is hard, when you break it down into these easy steps it becomes easier to tackle. So to summarize, the steps to creating a budget are:
- Do an inventory of your spending for one (1) preferably two months
- Categorize your spending into categories (ex. Groceries, rent, utilities, debt payments, etc.)
- Determine your total expenses for the month
- Determine your total net income for the month
- Readjust your budget so that your income minus your expenses for the month equals $0 (zero-based budgeting)