Here’s the reality, if you want to achieve anything of significance in your financial life (which impacts your ability to achieve significant things in the rest of life) you need a budget. Every successful company has a budget, and every successful individual should have a budget as well.
Creating a budget isn’t rocket science, but it can be difficult to maintain a budget. There are a few roadblocks that can make it tough:
- You don’t know how (we all start there)
- You can’t stick with it (we have all been there)
- Irregular income makes it difficult (many of us can relate)
- Life change (job change, kids, a move — life changes and so should budgets)
Let’s tackle some of these top reasons to help us better understand how we can go from no budget or failing budget (zero) to a budget template and a plan (one). Going from zero to one really is the most difficult step in any new venture. Once you see how to get started, everything else will begin to “click” in your mind. I’m not trying to say it will be easy, just that the first step is often the most difficult. So, let’s take that step right now!
1. You Don’t Know How to Budget
No one is born with the ability to budget. This means that even the best budgeters you know had to learn it at some point. Be encouraged, you can learn this skill too! I will create a more detailed blog on this step next week, but here are a couple of simple budgeting steps and processes that can help get the ball rolling. Let’s begin with the big picture.
Let’s do a quick a review of how to calculate income, and then show how income should be divided up for a monthly budget.
Income – How much do you make in a month?
Income is pretty straightforward, though it can an get more complicated for people who don’t work a “typical 9-5 job. If your income varies significantly month-to-month, then this will get a touch more complicated. I will start with the simple, and then move on to the complex.
If you have a regular paycheck, and that is the vast majority of your income, then just take how much money you make in the month and write that down. That is your monthly income.
If your income changes a lot each week or month, then I suggest you look at it on an annual basis. Then we can divide it up by month or week and go from there. You will have to do a little work, but it will be well worth it in the long run if you do. People with irregular income streams can often benefit even more by establishing a good budget. Simply total up your income for the last year, and then divide that by 12. This shows the average amount of money you will make in a month.
Ok, you should now have a good idea of how much money you make in a month. Make sure you write it down somewhere and take a picture with your phone.
Expenses – How much should you spend in a month?
Notice that I did not ask about how much you are currently spending in a month. That is a bit more tedious to work out and we can do that another time. The goal in this section is to see big picture how much money should be put into a few big buckets.
One widely used budget breakdown is to use three large buckets. There are a few other ways we can break it down, but let’s start here. The three bucket approach is:
- 50% – Needs
- 30% – Wants
- 20% – Savings & Debt
Now armed with this knowledge, we can start the simple math of budgeting. Take your total income each month, and multiply it by the percentages in the three buckets and write down how much you should be spending each month in these categories. You can do it on your phone by using the calculator app. Take your total monthly income and multiply it by 0.5 on the calculator. Then multiply your total monthly income by 0.3 and finally by 0.2. Well done, you now have a big picture idea of much money should be spent on what each month. I will write a more detailed blog post on breaking sown expenses into smaller categories soon.