Tiffany Raiford
Just because you have the money to buy something does not mean you can afford it, which is why learning how to make a budget is probably the single most important thing that you can do for your finances. I know that learning how to make a budget that’s effective, on point and helpful is overwhelming. I know that because only 40% of the American population uses a monthly budget to track expenses and income – and that is not enough. Probably the most common comment I hear as it pertains to learning how to make a budget is, “I don’t know where to start,” followed by, “I don’t live paycheck to paycheck, so I don’t really need a budget,”.
I don’t live paycheck to paycheck, either, but you better believe my family still has a working budget. I learned how to make a budget that’s both manageable and effective more than a decade ago when my husband and I were married and building our first home. We weren’t struggling by any means, but we wanted to make sure we always had our finances in order and that we were both perfectly aware of what was coming in, what was going out and where it was going. It’s become a habit that’s impossible to break.
In learning how to make a budget if you’ve never created one before, you’re going to learn one very important lesson; just because you have cash does not mean you can afford something. When you choose to splurge on a boat with your additional income, what are you taking away from? Because having the money to go out and buy a boat but not contributing as much as you can toward your retirement or living without an emergency fund means you don’t actually have the money to buy a boat. Unless you have everything else in order with your finances, you’re misappropriating your funds. It’s that simple.
If you are a budget-virgin, we’re going to teach you how to make a budget and how to ensure that you are able to live with it and stick to it for the long term. Also, you’re welcome; this information is going to change your life.
Start with Income
How much money do you have coming into your home? I want you to look above and beyond your regular paycheck and I want you to look to every penny that regularly enters your home. I don’t want you to account for money you don’t regularly make, like the occasional freelance job or babysitting gig that enables you to earn a few bucks a month – if you don’t receive that money every single month, don’t count it (it’s a fun extra, but you can’t count on it so you can’t count it in).
I want to know your paycheck, when it comes in and how much you net. I want to know about that $75 check your grandmother sends you every month because she loves you and wants to do something nice for you. It’s income, so you count it in. If you are serious about learning how to make a budget, you have to count every penny you regularly receive. Write it down.
Move on to Expenses
Now I want you to move on to your expenses; all of them. You’re never going to understand how to make a budget that works if you don’t include all your expenses. I want to know everything you pay each month to your mortgage company to your trash pickup to your cell phone provider to your babysitter for date nights to the gas you put into your car every month. I even want you to go ahead and include things that you know you will pay on a certain month.
For example, when I was learning how to make a budget, I didn’t think that I had to include things like date nights, annual trips and, eventually, our kids’ extracurricular activities. I’ve since learned that I know with certainty that every single April I will pay $200-$300 to sign my oldest daughter up for cheerleading, so I add that to the April budget every year. It helps to keep me on track and understand where everything goes.
Next, go ahead and write due dates next to each expense.
Now I want you to do something very important. I want you to learn that this is one of the most important steps when you learn how to make a budget. Without learning this step, you’re doing yourself a great disservice. I want you to add your own name into your expense list. That’s right; you are an expense. Not your shopping budget, or your entertainment budget; you. Yourself; your future. You.
You are an expense, and you should invest in yourself every month. This means opening a savings account if you haven’t already, and it means turning that into an expense. The first person you pay every month is you. When you pay you first, you never have to worry that you are not saving enough. It’s the most important part of your budget.
Go for the Assets
Where many people begin making mistakes in learning how to make a budget is not considering their assets. You must know what you have in retirement, how many accounts you have, what is going into those accounts and you have to consider savings and your emergency fund. These are all part of your budget, and they all deserve your attention. It’s here that you might realize you’re not actually contributing enough or that you have some wiggle room in the budget that will allow you to contribute more at some point.
Use an Online Tool
I’m not going to sit here and tell you that if you want to learn how to make a budget you have to use XYZ website or software program to help you. I’m going to suggest that you take a look at online budgeting tools such as Mint, programs such as Microsoft Excel and even others that have been recommended to you or that you’ve already read about. It’s very simple to create a budget using one of these programs, and it’s imperative because it takes the guess work out for you. When you use a program such as this, the program does the bulk of the work for you when you enter in your expenses so that you see where your money is going, where it is and what’s happening in your financial life.
Try it Out for a Month
I always tell people that the best thing they can do when learning how to make a budget is come up with a rough draft and try it out for a month. At the end of the month, look at what you’ve done. You’re either going to see great success or room for improvement. Either way, it’s good news! Now that you know what to expect and you’ve got a more realistic view on how you spend your money every month, you are more likely to be able to create a working budget that works efficiently for your family.
You see, as a first time budget maker, you might be off-base in some instances. For example, perhaps you grossly underestimated your monthly grocery budget. Now is a good time to look at it and ask yourself a very serious and very important question, “Can I cut my grocery bill by making lists or using a meal planning app, or do I need to adjust my budget to allot for a bigger chunk of change to go to my local supermarket every month?” This type of month-end evaluation is going to teach you more about how to make a budget that works for you than anything I can tell you.
Cut what you Can
Now that you have a good idea of what your budget looks like and how it works, ask yourself if you can cut anything. I cannot tell you how many readers comment with, “I have extra money, so I don’t need to cut my budget,” but I think that you do. Do you pay for unlimited text messaging every month and send only 100 texts? Cut that $20 unlimited text fee from your bill and add that additional $20 to your savings account or contribute it to retirement. Do you pay for cable television and never use it because you are a NetFlix junkie? Drop that $150 monthly fee and save it. You can always make cuts in your budget that will benefit your family and add to your savings, and that’s how you make a budget the right way.
Get the Entire Family On Board
One of the simplest and most underrated ways to make a budget successful is by getting the entire family involved. When it’s a family process, it’s much easier to stick to the rules and have full cooperation. For example, one of the things we did in our house is allocate a weekly cash budget for both my husband and me. We both have a habit of spending a few dollars here and there and everywhere and it really adds up – not to mention it takes forever to track down all those annoying tiny receipts when balancing the checkbook. Now we each take a specific amount of cash during the week so that we can stop for our coffees or bagels or lunches without having dozens of $2 coffee purchases, $5 lunch purchases and whatnot on our account. It also helps us keep our spending down.
My husband is notorious for going out to lunch with his colleagues and spending $20 here and $20 there, and realizing he was spending $500 a month on lunch was a big deal for us. Now he has a $75 per week budget for his ‘incidentals’ such as lunches out and coffee stops. It keeps his spending down and he’s found that he doesn’t even spend half of that anymore, so he always sticks what’s left at the end of the week in our savings account.
Have Realistic Expectations
One of the worst ways to make a budget is to have unrealistic expectations. If you start off today thinking that you are going to save $10,000 in three months so that you can put a down payment on a starter home yet your monthly take home pay is only $5000 per month and your expenses are $3000 per month, you’re not being realistic. There is no way you can minimize your expenses more than $1300 per month so that you can save $10,000. If you use the same numbers and say that you’d like to save $5000 in three months, you’re doing a little bit better since you can do that with ease. In fact, you can save $6000 in three months if you stick to the budget like this.
One of the biggest reasons many people give up after making a budget is because their expectations are unreasonable. If you take the time to have realistic expectations and you do things correctly, you will find that it’s much easier to stick to your goals and make a budget that’s more successful than not. While it’s great to stick to it 100%, it’s also a good idea to realize that you might break the budget from time to time and that’s all right, too, if you have savings for things like that.
Practice Makes Perfect
Don’t beat yourself up if you aren’t able to live exactly according to your budget the first few months. This is a period of trial and error and it’s often the time that many first time budgeters decide that they can’t do it and quit. Don’t be a quitter. Give it some time. You’re going to mess up, miscalculate and make mistakes. Go with the flow, learn from your mistakes and see how you can change those mistakes into success stories the following month. When learning how to make a budget, make room for error. Learn to accept it and turn it into a lesson that will benefit you financially.
Photo by Getty Images
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