Let’s face it, money comes with a lot more responsibility than we realize. This is especially true if you want to start your own business. One such responsibility is keeping up with all the expenses that seem to increase with time.
If we’re not careful, our income can disappear without us realizing what’s happening. If we don’t take the time to allocate money to the important things, we can find ourselves halfway through a month with little money to go towards our goals.
That’s why it is so important to have a budget.
Getting Started with a Budget
If you have never created a budget before, there’s no better time than now. But, you may be wondering how to even start the process. It’s really not as hard as it seems. To get started, let’s look at six steps to creating a budget.
- Start tracking your spending.
- Create goals that will help you stick to your budget.
- Create a list of income and expenses
- Include savings as part of your budget.
- Cut unnecessary expenses
- Continue to evaluate your budget.
The Six-Step Process
Budgeting is a simple process once you get started. The six-step budgeting process will help you create goals and get started. Remember to give yourself plenty of incentive along the way so you’ll be more willing to stick to the process.
Start Tracking Your Spending
Before you can really determine how to set up your budget, you first need to know where your money is going. A good way to do this is to track your spending for a month. You can do this through an online tracker, or you can set up a spreadsheet to record each transaction. Whichever way you choose, make sure you keep tabs of every purchase or payment you make.
You want to keep track of how much you are spending on wants versus needs. It can be easy to spend too much on the wants, and while you want to have some discretionary money, you want to have a good balance.
You are going to use this information to help you create a good balance between these needs and wants. This will come into play in some of the other steps, but you can go ahead and look at things that could be removed immediately.
Seeing where your money is going will probably shock you. We don’t always think about what we are spending our money on until we take the time to track it. As I mentioned, this step will also help you with some of the other steps.
Create Some Future Goals
It can be very hard to stick to a budget. The more you have to restrict your budget, the harder it becomes to keep up with it. That is where our next step comes in.
Before you sit down to create your budget, you want to set up some goals for your future. These are your reasons for creating and keeping the budget. Think about how you would like your life to look in one year, five year, and ten-year increments.
- Do you want to start your own business?
- Would you like to become a home-owner?
- Want to learn how to scuba dive or mountain climb? Or something less risky but equally fun to you?
- Would you like to travel?
Really think about the things you would like to accomplish in your life. Write down these goals and keep them somewhere that can be readily accessed any time you need to be reminded why you’re limiting yourself now.
Determine Your Monthly Income and Expenses
Now that you have your motivation to actually create and stick to a budget, let’s move into the actual budgeting system. Before you do anything else, you want to determine your monthly income. Even if this can fluctuate, you can use an average for each month.
Write down your monthly income from each source. It will also be helpful to write down how often you get paid from each source during the month and the amounts from each paycheck. Knowing when the money comes in will be helpful in a later step.
Once you have all your income listed, you want to determine your regular monthly expenses. Start with the most important:
- Shelter (house payment, rent, electric bill, and/or gas payment, water bill, etc.)
- Food (groceries, feeding animals, etc. note: this does not include eating out; that’s an extra)
- Transportation (car payment or transportation fee, insurance, registration, etc.)
This list includes the absolute necessities to survive. There is some room for tweaking; for instance, if you live within walking distance from the places you need to go, you may not need the transportation element.
Another point to keep in mind is not all of these will be a monthly necessity, such as clothes or car registration. You will still want to divide the cost of these items monthly to put aside. This ensures you keep that expense in mind throughout the year.
Debt, Savings, and Giving
Once you evaluate your necessities against your monthly income, write out the amount of income you have left. Now it’s time to move on to the other monthly expenses:
- Debt owed
Make a note of all the debt you currently owe. Based on the amount, determine how much you can spend monthly to pay off these bills. This is an important step. Your goal is to live debt-free.
Savings is also an important expense. Even if you can only put $10 aside monthly, you want to start putting something aside. To ensure you do this, you can set up an automatic savings withdrawal each month.
This is your start to those goals you want to achieve later. It is also your emergency fund for unexpected expenses that will inevitably come up.
Giving is also an important aspect that gets put aside. As strange as it may seem, the ability to be generous with what we have (within reason) adds value to what you have. I’m not talking prosperity gospel here, God does not care how many material things you have. Somehow though, giving has a way of stretching what we have.
Cut Unnecessary Expenses
Make note of any other expenses not covered in these categories. Determine how much money you have left after covering these essentials and see how much you can allocate to the other expenses you have.
This is where it can become a little more frustrating. It is time to start looking at what you can cut. This is more important if you find you have more expenses than income. You may be thinking that all your expenses are necessary, but that’s just not true.
- Cable: Let’s face it, there are more economical ways to get your screen fix these days.
- Subscription services: As much as you may enjoy your magazine, audiobook, or whatever other subscription you have, they are not necessary.
- Eating out: Even fast-food can add up over a month. It is a proven fact that eating at home is significantly cheaper than eating out.
- Phone: If you have a landline and cell phone, you can cut one of those out. You can also downgrade your cell phone to a cheaper model and get a less expensive plan.
- Internet: Unless you work from home, it is possible to cut out internet if you need to. Most libraries have computers if you need the internet for something.
Can you think of anything else? Evaluate where you are spending your money, and determine which expense can be given up, at least for a season. This is where that step of tracking expenses comes in handy. I bet if you look through your monthly spending you can find something.
This is also the time to look through the other expenses you have written down from previous steps.
- can you cut down on your monthly clothing expense? You don’t have to wear name-brand clothes.
- Could you buy store-brand groceries to cut down on the food bill? I realize some store-brands are awful, but some are actually comparable.
- Could you find times to turn off the air conditioner or heater through the year so you can cut down on your electric bill?
Evaluate these things to see where you could be decreasing that monthly burden. Keep those goals in mind as you go through this process. If that doesn’t help, think about the possibility of having some funds for entertainment.
You can also use rebate programs such as Rakuten to get cash back on certain purchases. If you use this only to make purchases you need, this will add to your savings.
Make sure you stick to the budget. Whatever you budget for groceries, that’s what you spend, no more. Whatever your budget for savings goes into savings each month (automating this will help). Do not try to fudge the budget or it will do you no good.
Schedule Regular Quarterly or Yearly Evaluations of Your Budget
Once you have your budget squared away, it’s time to create a document or spreadsheet to make it easy to read. This is something that you can print out and keep handy, so you remember how much you are allocating each month.
This official budget will also help you to re-evaluate your income and expenses throughout the year. You will want to schedule time at least once a year to take a look and evaluate any changes you need to make to the budget. It will be even better if you do this evaluation more regularly, especially in the beginning.
You will also want to re-evaluate if you get an increase in income, you get a debt paid off, you find yourself with a new necessary expense, or any other change to your income or expenses occurs.
Checking your budget through the year will also help you make sure you’re sticking to the plan.
Planning Your Goals
Remember, this is just the basics of budgeting; a way to get you started. As you get used to the plan, you will want to increase your budgeting efforts, and this re-evaluation will come in handy when that time comes.
Would you like more tips for handling or making money? Check out more planning tips to help you reach your goals.