7 Steps to Build A Better Budget

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7 Steps to Build A Better Budget

talessi@ariesfoundation.org

You Cannot Save Until You Know What You Spend

My belief has always been that there are 3 kinds of people when it comes to having a budget; the first knows exactly where everything is spent. They have spreadsheets and trackers and can tell you exactly where they stand. Person #3 has no idea; money comes in, money goes out, there is no plan or worry about what's ahead. And then there is person #2, who thinks they are a 1, but really acts more like person #3.

Where do you stand?

No matter where, or which number may be a fit for you, we want to give you some ideas to help get your budget started, or be better prepared with the one you are using.

1. It's An On-Going Process

The best way to set yourself up for budgeting success is to understand that budgeting is an ever-evolving strategy you will use to live your life financially fit. Instead of thinking of budgeting as a one-time or occasional chore, it’s better to think of it as something that needs to be done on a regular basis, much like doing your laundry.

Like financial goals, your laundry is an ongoing responsibility that cannot be avoided, ignored or forgotten without some serious problems cropping up. Getting your head wrapped around that when you begin your brand new budget that you are committing to a regular and ongoing process will help you maintain your budget, which is far more important than just creating one.

2. Know What Your Income Is

For anyone who receives a salary from a traditional employer, this part will be very simple. You’ll just need to take a look at your most recent pay stub to see how much you earn per paycheck. You can then multiply that by number of times your paid (26 or 52) and divide by 12 to get a monthly figure.

However, if you work as a freelancer, have side hustles, earn hourly pay or overtime or rely on tips or commission, it isn't as easy to calculate your monthly income. We suggest using an averaging process of the last 3 or 6 months of earnings. This can give you a geeral idea of how much you earn on an average monthly basis.

3. Must Pay Expenses

We refer to these as "hard dollar" costs. Those items that need to be paid in order for on-going living expenses. Most people have a basic sense of their fixed, or recurring, expenses. For instance, you know exactly how much you pay for your rent or mortgage each month. However, some of these expenses can be variable, like groceries, or medications, car repairs, which makes it harder to track. For variable expenses, it’s a good idea to calculate the monthly average over the last 12 months. (If there are expenses that don’t come up monthly, add up the total annual amount you have spent and divide that amount by 12 to determine your monthly average.)

4. Pay Yourself First

We've talked about treating yourself like a bill, so you had better have "YOU" as a line item in your budget. And contributing to building up your Emergency Reserves Bucket (see "What's In Your Buckets?") should be objective numero uno. Add in if you plan to also contribute to a retirement plan, or make debt repayments, then add those in as well.

5. Discretionary Spending

What we refer to as "soft dollar" expenses. Here is usually where our plans or budget go sideways. What we allocate for this spending typically is the one that gets away from us, usually really, really quickly. Think of these items as all the "fun" stuff we spend our money on. Which is fine, unless we don't know how much or how often we are spending and what that "fun" is really costing us (see "Track Your Figures"). This can be an eye-opening experience for some, especially those who have never really looked at what is being spent on a weekly basis for; coffee, snacks, or even lunch. Take the time and get a handle on what you are spending for soft dollars on a regular basis.

6. Compare & Refine

Just because you've put all of your numbers together doesn't mean you're done. Now you need to review the whole picture. You need to compare your expenses to your income. If the expense number is lower than or equal to your income number, then your budget is balanced. In that case, you are ready to implement your budget.

If, however, your expenses are higher than your income, then you need to adjust your spending. You can do this by playing with your "soft dollar" or variable expenses. Understand that the idea about adjustments is that you should focus on the discretionary spending or variable spending (such as your grocery budget) before you reduce or modify the Pay Yourself First line items. This will help ensure you reach the important financial milestones that matter to you.

7. Take Action & Track

If you have a balanced budget, you’re ready to put your plan into action. Start spending and saving based on the budget you have created. Implementing your new budget is about more than just keeping your spending limits in mind, however. Remember this is an ever-evolving process, so keeping track of your spending to identify any weak spots is key. There are many ways to track, but if you are just starting we recommend to begin with a pen and paper for a short period and then transfer to a spreadsheet or app. As you implement and track your budget, you’ll notice patterns over time. These will help you make changes as needed to your budget and figure out what is important to you.

Got Questions? Ask Us. We Can Help With That!

The ARIES Foundation for Financial Education, Inc. is a nonprofit oprganization dedicated to the mission of trying to help everyone ahve a better relationship with their money.

Learn more www.ariesfoundation.org

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