If you’ve never created a budget before or simply need a fresh start on one, here are 6 Steps to implement:
STEP 1. TOTAL YOUR MONTHLY TAKE-HOME PAY
First things first: How much money do you have to work with? Add up what you earn each month after taxes and payroll deductions, because you want to work from money that’s being deposited into your bank account. Include not only income from a regular paycheck, but also the take-home pay you earn from a side gig or part-time job.
STEP 2. ADD UP WHAT YOU SPEND ON FIXED EXPENSES
These are the bills and expenses that you plan for — the things you need on a regular basis. They include essential costs that don’t already come out of your paycheck, like your mortgage or rent, car payment, utilities or day care. This can also include things like what you spend to feed your family each month. These are basically the fixed expenses that keep your life running.
STEP 3. ADD UP WHAT YOU SPEND ON NON-MONTHLY COSTS
One part of a budget that individuals typically don’t account for are irregular, non-monthly payments. Because these types of costs can fall off your radar until right before they’re due, it’s important to account for them in your budget.
Add up what you spend every year on things like quarterly taxes, auto registration fees, annual insurance premiums, school tuition and travel. What you spend on gifts for holidays, weddings, birthdays can also fit in this category.
Then take that total and divide by 12: This is how much you should put away each month in a separate savings account so that when those bills roll around, you know you’ve got the cash to pay for them.
STEP 4. ADD UP CONTRIBUTIONS TO FINANCIAL GOALS
This category includes what you’re currently putting toward savings goals, paying down debt or any other longer-term financial goal. Each month, the payments that you make to these goals will get you closer to financial security by helping you pay down any debts you owe and save so that you’ll be able to do the things that are important to you.
STEP 5. ADD UP DISCRETIONARY SPENDING
Discretionary spending is money that you can spend on whatever you like that isn’t already a fixed or necessary expense. It’s the extra money that you can use for things like going out on the town for dinner with friends or taking a much needed vacation over a long weekend.
If you’re not sure what this figure should be, look at how much you’ve spent over the past three – six months and use that as a starting point to get a clearer picture. Or pick a month that you’d consider a typical month as far as your discretionary spending goes, and use that figure.
STEP 6. DO SOME MATH
Take your total monthly take-home pay and subtract your fixed expenses (including non-monthly costs) and your goal funding.
What’s left is how much you have available for discretionary spending on a monthly basis. Is this number higher than what you added up as your actual discretionary spending? Congrats — you are living within your means!
But if your actual discretionary spending is higher than what the math says it should be, it means you’ve got some work to do in order to properly plan. You’ll have to figure out which of your expenses are eating up too much of your budget, and where you may want to cut back to make sure you aren’t going into debt to afford your lifestyle. Even if you aren’t overspending, though, it’s still worth taking a look at your expense categories to figure out if you’re happy with where your money is going compared with the goals you have for you or your family.
Crafting the right budget for you means finding a balance between being able to afford your lifestyle now while saving for your future later — without feeling like you’re depriving yourself. So don’t be afraid to adjust your figures as your goals shift. One’s life is constantly changing, so your budget should change over time as well.
If you have questions about this process, please feel free to reach out to Southern Coast Wealth Advisors at any time.