Budgeting may be one of the most crucial exercises you can complete on a road to a healthy financial life, but that doesn’t mean it’s an easy or intuitive process. Budgeting is work, and unfortunately there is no way around it, but there are a few options for how to approach it.
MANUAL TRACKING VS. AND ONLINE AGGREGATOR
Before considering how you want to track your budget, think about how you normally spend money. If you normally use cash or checks to pay for things (yes, checks are still a thing), an online budgeting program probably isn’t for you since they tend to track your spending based on the activity they see coming through your credit or debit card charges. On the other hand, if spending in cash is a rare occurrence for you, an online cost aggregator like Mint or You Need a Budget (YNAB) may be just the ticket.
ISOLATING YOUR INCOME
The first important item that drives your budget is your monthly income. For some of us with regular monthly salaries, this is easy to predict because we receive the same amount every month. For the rest of us, predicting our monthly income may be slightly more difficult. In this case, take a look back at the amount you have received for previous months and use an estimate. When estimating income, be sure to factor in the actual amount you receive from your employer each month. This should be your “take home” pay, or in other words, the amount you take home after taxes, insurance premiums and retirement plan contributions have been removed from your paycheck. Without understanding your income level, it is nearly impossible to know what your budget limitations should be.
FIXED VS. VARIABLE EXPENSES
Next you’ll need separate your expenses into two categories: fixed versus variable. Your fixed cost are any costs that are regularly occurring and would take significant effort to change. For example, your rent or mortgage would be a fixed cost since the amount is usually determinable every month and would only change if you were to pursue a new living arrangement. On the other hand, variable expenses are the expenses that will change month to month and you can control with more ease. Examples of variable expenses would be food and entertainment.
FIND AREAS FOR IMPROVEMENT
Once you’ve calculated how much you are spending in each category for that month, you should be able to see trends develop. The ultimate goal should be to have money leftover to put into savings or invest. If you are able to accomplish that on a monthly basis, congratulations! You’re ahead of nearly 66% of the population.
If you’re unable to squirrel money away on a regular basis, take a look at your variable expenses first. Is there an area where you could easily cut back while still maintaining your financial philosophy? If you can’t find any areas of savings within the variable expense category, you may be living outside of your means and you should turn your attention to your fixed expenses. Are you paying too much for housing? Perhaps you could find a cheaper apartment or look into getting a roommate? Also, don’t forget to consider your income. Do you have the potential to negotiate a raise at work or pick up some extra hours?
Most importantly, remember that budgets are like diets. Sometimes you will have bad days, but all is not lost. Tomorrow is a always a new day.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.