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So with it being right after the New Year, it is a good time to re-evaluate expenses and a budget. This is especially after the year we all had with 2021. Budgets should always be updated at least once a year if not more often. If possible, re-evaluated monthly or every quarter is better. Creating a budget always seems more difficult than it is. Making sure that everything is accounted for with bills and income. It can be a little nerve-wracking due to having to stick to guidelines of what is set in place. Once the budget has been established, it should be a priority.
Updated for accuracy in 2021
A lot of the information in this article continues to be pertinent. If nothing else, it is even more important due to the risk of changes to income. Goals should be to get out of debt and build up a savings account. Should always plan or try to build up at least 3-6 months of expenses, which should be done after paying off debts.
How much are you bringing in?
The first thing that you should do is write down what you are bringing in. This is very straightforward, take your paystubs over the course of the last month and add them together. If you have a variable income, again take the total over a few months then divide by the number of months. Now subtract your expenses from your income. Taking this information and how much your monthly expenses are, can help to make sure that your budget is in the black.
Where to start with creating a budget?
Starting is always the most difficult part. This isn’t necessarily the most fun process but the most important. The simplest way is to simply jot down all of your monthly expenses and how much each one is. You can try to recall this all by memory but the quickest way is to check your bank statement. This ensures that you don’t forget some expenses. Any forgotten bills can have significant repercussions on your budget and impact your savings.
These fall within 2 categories, static and dynamic expenses. Static expenses are bills that stay the same every month. Keep a list of these expenses and a running total as this will create a base for the budget. These are things such as Cable, phone, mortgage, etc. Things that may be overlooked that are static expenses are things like retirement funds or 401ks. These are important to make sure that you’ve budgeted for.
The other is dynamic expenses. These are the expenses that vary from month to month, you can add up the total amount of expenses over the past 3-6 months and divide by the number of months. For the bills that fluctuate, such as heating or electricity, you can add up them separately and dividing by the number of months added together. This will give you a better average to put in the budget. You then can combine the static and dynamic expenses to get the total for the monthly budget.
Envelopes may be a good starting point
In a previous article, we broke down the use of envelopes to help categorize your purchases/expenses. It is a simple method but can be effective. It may not be for everyone, so make sure you read through to see if its something that would work for you and your family. This was an update from the original 2018 edition of the article.
What about if the expenses are more than the income?
If there is a negative discrepancy, then you know something needs to be adjusted. Such as how much heating you need, even turning down the temperature by a couple of degrees. Everyone’s budget will be a little different and so find what works for you. This will come down to lifestyle modification. You can also look for other ways to add to your income such as selling old clothes in a yard sale, blogging, survey sites.
What if there is extra?
If there is extra money in your budget, I recommend the zero balance budget that is recommended by Dave Ramsey. This is not a sponsor of this blog, but I like a lot of the principles he puts forward to save money. What this means is that at the end of the month the budget should be zero. Say you have $100 left in your budget I’ve done this song at the end of the month, you can put 70% or $70 into savings and the other 30% as extra spending money. This is also a good time to determine if you are able to put money away for random expenses such as for a Christmas fund or rainy day fund. Some months expenses will be a little more than others. Some months have birthdays or holidays. All of your income and expenses should be accounted for on paper.
I do recommend that if you are able to put a little bit of money towards something fun for the month then do it. This will make it more likely that you’re going to stick with your budget. This shouldn’t be a majority of your money but I usually recommend maybe 30% of what’s left after expenses.
Creating a goal for your budget
Similar to the extra money, you have to think about what your overall goal is. Is it to pay off a credit card? If so, any extra money should be put towards the principal balance on overdue cards. If your goal is to build up your savings, the example up above works. Where you’ll take 70% of what’s left after all your expenses and put directly into savings. There are a vast number of goals that you can set, saving for Vacations or putting money away for holidays. This is something that you’ll have to take into consideration when planning your budget.
If you have a lot of credit card debt, this should be the first thing that you start to pay off due to usually high-interest rates. If you still want to put money towards your savings then I would recommend putting 70% towards credit cards and 30% of what’s left into savings. This may not seem like much, but remember savings is a marathon, not a sprint.
Revisiting your budget
As previously stated, you want to recheck your budget periodically. I recommend a bare minimum of at least once a quarter (3months). If you have time, I would suggest more often. Expenses can change often. This is especially true with dynamic expenses. Dynamic expenses averages can change either for better or worse. It is important to re-evaluate these specifically every few months at least. The other thing to remember is that anytime you have a new bill, make sure to update the budget relatively quick.
Creating a budget for 2020 is not inherently difficult but it can be difficult to stick to at times. Any time you want to purchase something outside of the normal, then you should be evaluating to make sure it fits within the savings. This is why I recommend putting some money per month towards savings or for personal spending. Like I said earlier, all of your money should be accounted for during each month.
You may have to wait on some purchases to have set enough aside but this saves you struggling in the long run. Some people use a budget as a guideline which is fine, but I recommend sticking to this as best as you can. It can be difficult at times to stick to it, but outside of drastic changes (refrigerator breaking, furnace going, etc) then you should be sticking to this as close as possible.
These are all suggestions as I am not an accountant but this gives you a good starting point. If you want more advanced suggestions, I would recommend talking to a financial advisor. These are the things that have worked well for me when creating a budget and building up our savings. I also recommend listening or reading through Dave Ramsey for additional advice!
Do you have any other suggestions that I missed? Leave a comment below