When you first start out on your own, creating a budget is an easy thing to do that will set you up for success. Even a simple budget will help keep you on track and focused on whatever priorities you have set for yourself.
A budget only needs to be as complicated or as simple as you want it to be. At its most basic level, a budget has two categories, Expense and Income. If all you do is identify how much income you generate per month and what your monthly expenses are, you are already well positioned to be able to start setting realistic goals.
The goal of a budget is to spend less than you earn. If your expenses exceed your income, you’re going to have to make a change and the sooner you make it the more good (or perhaps the least bad) options you’ll have. If you find yourself in this position and delay making a change to correct the deficit, you’ll end up with only bad options.
Once you’re able to get to the point of spending less than you earn, that difference should be accounted for under a Savings category.
The expense category lists everything that is a predictable monthly expenditure of your money. Bills, food, and rent are the most common expenses that you’ll encounter. The goal of this populating this category is to create an understanding of how much money you spend every month. Armed with this knowledge, you are better positioned to make smart choices about your income and savings.
Make a list of your monthly expenses and list the dollar value associated with each. I recommend that you round up to a number that you’re comfortable with to make things easier and to have a higher likelihood of generating savings. For example, if your grocery bill falls on a range between $250 and $275 per month, I might round that up to $300.
It’s helpful to review your bank statements to help identify where your money is going and how much of it is being spent. Often times, looking at your bank statement will reveal things that you had no idea you were doing.
With your list created, add up all the expenses and you’ve created your monthly expenses.
Under the income category, you should include everything that is a predictable source of income. Things like your paycheck, or a deposit from your parents, or a court settlement, or a retirement compensation. Anything that is regularly given to you that you can choose how to spend.
If your monthly income varies depending on your work, that’s ok too. Set a target monthly income for yourself based on your expenses.
Once you have all your regular monthly incomes listed, add them up and compare your income to your expense. If your income exceeds your expense, good job, now it’s time to start setting savings goals. If your expense exceeds your income, it’s time to start looking at ways to correct the deficit.
The items in the savings category are entirely up to you and your priorities. Maybe you want to save up for a trip to the Caribbean, or maybe you want to buy a house? Here is where you get to dream big.
One practical goal for saving is to have an emergency fund. An emergency fund can be in an entirely separate account or just a number on your budget and in your bank account that you’ve decided is only for emergencies. However you go about tracking your emergency fund, having that to fall back on in the event that you find yourself out of work for several months will make dealing with the emergency that much easier.
A good target for your emergency fund should be three times your monthly expenses. This would make it possible for you to live without income for three months and still not go into debt.
If you find yourself in a position where your expenses exceed your income, make a correction as soon as possible. Continuing to spend more than you earn will put you in a position where you have only bad choices.
Correcting the deficit is simple, but not easy. There are two things you can do and you can do both at the same time: spend less and/or earn more.
To spend less, you need to take a hard look at your expenses and find things that you can reduce or eliminate. Reducing visits to restaurants, eating out, coffee, food-carts or fast food is a great way to not only reduce your expenses, but also to improve your health. You’ll likely see an increase in your grocery bill, but the amount of food you get for $1 of groceries far exceeds the amount of food you get for $1 at a restaurant.
Earning more is probably more difficult than spending less. You’ll either have to get another job or negotiate with your employer for a raise. Though it’s tough, it’s far better to have to work hard than to end up dealing with collection agencies.