I saw a crazy statistic the other day:
78% of Americans recently reported that they live paycheck to paycheck.
That’s over 255 million freaking people!
But, here’s the kicker:
When you learn how to budget your money, you can remove yourself from this statistic.
Even if you don’t live paycheck to paycheck, budgeting is necessary for everybody.
Budgeting your money doesn’t have to be hard or scary, simply follow these steps to get started:
- Establish Your Why
- Gather Your Financial Information
- Calculate Your Income + Expenses
- Cut Costs
- Choose A Budgeting Method
- Track Your Budget
Keep reading to dive a little deeper.
Establish your why
The first thing you must do on your budgeting journey is to establish your why.
Establishing your why is simple. Just ask yourself these questions:
- What will budgeting help me do?
- How will budgeting make my life simpler?
For example, you might want to start budgeting to stop living paycheck to paycheck, to pay off debt, or to save more money.
Knowing your why is helpful because it creates meaning for your purpose. Without it, you’d have no motivation to continue budgeting.
Gather your financial information
You’re simply going to gather up your financial information. (i.e., pay stubs and bills)
You’ll want at least a months worth of pay stubs and all of the bills that you currently pay.
CALCULATE YOUR INCOME + EXPENSES
Ok, now that you have all your financial information in one handy place, it’s time to organize that information in preparation for creating a budget.
Take all the information you gathered for step two and write it down on a piece of paper
Total = $4,100
Rent (fixed) – $900
Car Insurance (fixed) – $80
Credit Cards (fixed) – $250
Utilities (fixed) – $150
Cell Phones (fixed) – $100
Groceries (variable) – $500
Other (variable) – $100
Total = $2,080
Writing down your income and expenses is a necessary step before you can create a successful budget.
Because, once you have this information in front of you, you can:
1. Determine how much money you’re working with (your income)
2. See which items need to be included in your budget (like fixed expenses such as rent)
3. See which expenses can be reduced, if necessary, from your budget (like a utility bill)
4. Determine where you overspend (on things like coffee)
Alrighty. Now we can finally start budgeting!
Once you’ve calculated your monthly income and expenses, you can quickly decipher if you’re living within or above your means.
To do this, simply subtract your total expenses from your total income.
If the number is a positive number:
You’re in the green and should be able to afford your lifestyle with ease each month. If you’re struggling to pay your bills, it is because you aren’t currently budgeting correctly.
If the number you calculated is a negative number:
You’re in the red and cannot afford your current lifestyle, meaning you will have to decrease your expenses if you want to stop living paycheck to paycheck.
There are different methods to budgeting, here are a couple:
The Zero-Based Budget
Simply put, a zero-based budget holds you accountable for every dollar you earn. This does not mean that you’ve spent every last dime by the end of the month. It simply means that you have assigned every dime of your income a job.
For example, you would assign a monetary amount to all of your expenses, to your debt repayment, to your savings accounts, and more.
Then, at the end of the month, all of your money has either been spent on expenses or put into a designated bank account.
A zero-based budget is great for people those of you who live paycheck to paycheck and want to eliminate overspending and waste from their budget.
The 50/30/20 Budgeting Method
This budget is simple and concise. The premise is that you allocate 50% of your income to your needs, 30% to your wants, and 20% to savings and debt repayment.
This budget is perfect for people who aren’t living paycheck to paycheck but want to be more responsible with their money.
If none of these budgeting methods seem like a good fit for you, don’t worry.
There are tons of budgeting methods out there and when all else fails, you can simply make your own.
Create a budget using a budgeting method that works for you and your lifestyle.