Since we are only a few weeks into the year, we at Saving For Hope decided to do 3 posts to help you start the year right: 1- Budgeting 101, where we will show you how to budget even if you have never done it. 2- Paying off debt 101, where we will show you how to get right of those pesky credit cards that had been lingering way too long. 3- Saving 101, Where we will show you how to save using a simple method. Imagine yourself in a few months from now, with no credit card debt, a nice emergency fund in the bank, and saving some extra cash! With this inseparable trio (budgeting, paying debt off, and savings) you can get there this year.
In this post, we will tell you how to start a budget, even if you think you don’t make enough money or have enough time to do so. In fact, the less money you make, the more you need a budget to harmonize your finances. We already wrote a post debunking the 3 most common excuses people use not to budget. If you want to know the reasons why to budget, we suggest you start there. If you are already past that, congratulations! Now it is time to start budgeting like you mean it.
Now, before we start, it is good to acknowledge the idea that budgeting is not the right approach to organizing your finances. To those people, we say, it might not be for you, in the sense of tracking expenses and having a category for each item in your life. It is hard and takes time, we know. However, even if you just take the NUT approach (where you categorize all your expenses and then the “leftover” is spent on different items as you see fit) that is budgeting. Budgeting is the idea that you need to know how much money comes in, how much money goes out (and where) and what is left to save or spend. It is simple when you think about it on those 3 terms.
That said, let’s get to four steps to get you started.
Know how much you make. Really, know exactly how much comes in each month (if you are one of those people that have a variable income (like sales people) then you need to know what your monthly average is). Remember to add money that might come irregularly, like a part time job, etc. We at Saving For Hope call this principle: “multiple sources of income”, and we wrote an article you can check out here. When you know how much money is available to your family each month, then you can start looking at your expenses.
1- Look for ways to add more money: Ask for a raise at your job or take advantage of a promotion. Also, you can use unconventional methods, like a garage sale to pay off some debt, or taking a part time job for a little while. You can do this and start making a LOT MORE each month.
2- Write down your income and KNOW that number!
Write down all your expenses. Seriously, write down everything you pay, including cable TV, student loans, credit card debt, and insurance. The two most neglected areas (in our opinion) are food and beverages. You will be amazed at how much money you spend on food, restaurants, and drinks, if you are not careful. When you have all of your expenses down, start by putting on top those that are nonnegotiable, like rent (or mortgage) or insurance. From there you will have a nice visual that will show you, what items cost you the most, and what items you can either eliminate or modify to save money.
1- Eliminate those expenses that you can do without, like cable TV or that subscription to the magazine that you never read.
2- Look for those “budget leaks”, that cost you a ton of money, but you are not aware of. Like Gym memberships, or hidden fees on one of your credit cards. Most families have at least one of two of those. Find them and destroy them right away!
See what is “leftover”: After you have your income and your expenses down, pay your expenses and If you do not have anything leftover, you need to consider significantly adding to your income, like getting a roommate, or getting a part time job. At least until you get out of the debt that is taking you down. If you have money left over, then you can use that money to start getting ahead. In this article, since it is a beginner’s article, we will ask you to save an emergency fund.
1- If you don’t have money after you pay all your expenses, you need to add to your income. Find a way that suits you. A part time job is always a good start. If you are going that route, try to find a job doing something you enjoy, that might open opportunities for you in the future.
2- if you have money leftover, use it to start an emergency fund. We recommend you save at least $1,500 to get you going.
Stay on track. After you work on the 3 previous action plans, stay on track until you have a small emergency fund. When you get there, revise your budget again to see what has changed. Usually it takes families like 3 to 4 months to get to this point. But those 4 months are critical.
1- Stay at it. keep it up. Consistency and discipline is the key to get to this point. Don’t give up.
2- revise your plan 3 to 4 months after you started. That way you can see if any revisions need to be done to your plan. Remember a budget is a “living document” it will change as you pay off debt and start making more money.
Finally, we wanted to give you a bunch of free resources that you can take advantage of: 1- A budgeting software that can help you get your finances on track, click here and here. 2- Dave Ramsey has free downloadable cash flow forms (for their Zero-based budget) here. Use that if you prefer to do this by hand. 3- Here is a free downloadable envelop template. For you to make you envelop budget system.
In our next article, we will teach you how to pay off your debt quick. Stay tuned, as we get you started this year on the right track to financial freedom. Enjoy!