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We must consult our means, rather than our wishes
~ George Washington
If you are broke, the first advice you’ll get is to set up a budget and make sure you stay within your budget. However, budgets are not just for when you’re broke or even in debt. Budgets are for everybody. Budgets help you live within your means and they show you how much room you have to save. Better still; they challenge you to get more bang out of your buck and save even more. If you are looking for financial independence, a budget is a great way to start. This blogpost tells you how to create a solid budget.
You can create your budget on paper or in a spreadsheet document. I like to use Excel, since it allows me to create sums and see what results small (or big) changes may have.
1. Write down your income
And the key is: all your income. Not just the steady paycheck you’re getting every month, but also the smaller bits. The benefits, the money you earn from sidehustles. Even though these types of amounts might change every month, it is a good idea to note them down. Otherwise, chances are that they will get ‘lost’ later on.
2. Track your spending
If you have the time and the patience, you might take a month or so and track your spending. Write down every cash and card payment, specify what you bought (e.g. clothing, food, gifts..) and make a nice list. If you haven’t got any patience, you can use your bank and credit card statements to get a good idea of what you’re spending. Distinguish between fixed and variable expenses. Fixed expenses are the expenses that you just have, like rent, mortgage, car payments, etc. These are unlikely to go down anytime soom.
Your variable expenses are for example what you spend on food, going out, clothing, etc. It’s nice to have money for that, but if push comes to shove, you can cut back on most of those things.
3. Set some goals
Why would you want to create a budget? You probably have a specific goal in mind. Maybe you want to pay off your mortgage, or buy a new car. Or maybe you don’t have any right-now-goals, but you just want to save up enough money so you can put your kids through college.
Setting goals is the first step in turning the invisble into the visible
~ Tony Robbins
If you have goals, you know where you want to go. They motivate you to keep going. And you’re actually getting somewhere. It’s important to set goals that are in line with your values. If you are just working toward saving up a specific amount of money, but don’t really know what you want to do with it, it usually doesn’t work. You will probably end up with that amount (unless it is a zillion dollars), but it won’t bring you happiness or fulfillment. So rather than just setting a goal in terms of an amount, create a vision and use that vision to set your goals. Set your goals SMART: Specific, Measurable, Attainable, Relevant, and Timely.
4. Create your own plan
Now you know what you earn and roughly what you spend, you know how much money you got left at the end of the month. Or how much month you got left at the end of your money. Now it’s time to create a plan, that will get you to your goal. How much time do you have to reach your goal? And what does that require?
If you want to save $5000 by the end if the year and you currently have $200 to save every month, you will need to find a way to A) make more money or B) spend less. If you want to save $5000 by the end of the year and you currently have $1000 to save every month, you might want to think about setting a more challenging goal, since you are obviously playing it waaaaayyy to safe here!
You can also set up smaller budgets for specific parts of your spending. For example $300 for grocery shopping or $100 for eating out. This will help you predict your spending, and that information will help you to get to your goal.
5. Screw it, just do it!
That’s what Richard Branson says about just about everything. And he’s absolutely right. If you have a plan and a goal, you just have to get started. Are there any expenses you can cut back on, to save more money? Do you have specific habits you can change? What about cycling more often, instead of taking the car? Couponing to save money on grocery shopping? Make your own beauty products instead of buying them? Consider every item on your spending list and try to find other (cheaper) ways to make it work. And you don’t have to do it all by yourself; I often just Google things like ‘cheap recipe [whatever leftover I have]’ or ‘free [whatever I’d like to get for free instead of buying it]’. You’ll be surprised about how much you can get for (almost) nothing. And if you cannot find a cheaper option, trying going without for a while. You’ll also be surprised how much you can do without!
Be especially aware of the small amounts that you spend. Think about that Latte every day on your way to work, those pre-cut vegetables or ready-to-eat meals. It might be dollars or cents at a time, but these small things add up. And if you don’t really think that’s true, you might want to read the story about janitor and gass station attendant Ronald Read, who saved his pennies and became a multi millionaire… That shows that you do not need a big paycheck to get rich!
6. Stay on top of your budget
If you have a budget, you have to stick with it and adjust it if necessary. Keep writing down everything you spend, to see if you are still on track. Keep checking your budget and see how you are doing there. If you are consistently overspending, consider upping the budget. If you are consistently underspending, you might want to cut the budget a bit and add more to your savings (and increase your savings rate).
Every six months, take some time to see what you accomplished in the past six months and adjust your budget if necessary. The goals is to create a budget that is workable, but also challenging. And of course: a budget that will help you reach your goals, both in the short term and in the long term.
How are your budgeting skills? Do you have a monthly budget, or do you think that budgets are overrated?