And now for my next trick, I will successfully manage my money using just my budget!
If it were that easy, more people would budget. Budgeting is tricky. It’s one thing to notate and categorize expenses, but it’s a whole other ball game to cap your spending. For this month’s blog, I will show you how to BYOB using these five easy steps:
Step 1: Record your expenses.
What does that entail? Write down every transaction you make – big or small. If you are tech savvy, start your budget on an Excel spreadsheet. Make sure you record the date, item or item description, place, and then identify whether or not the transaction is a debit or credit.
Debit: Money going out of your account
Credit: Money going into your account
Subtract the amount from your balance, or add the amount to your balance and you’re done! Now, on to the next step.
*Tip: Use “Google Sheets” to record your transactions on the go or at home! There are also many apps available to help you with your budgeting needs.
Step 2: Categorize your expenses.
Recommended categories include: housing, transportation, food, personal care, healthcare, debt, utilities, and entertainment. Everyone is different, so feel free to create categories as you see fit.
Step 3: Cap it!
Now that you know where your money is going, figure out where you can decrease your spending or create a category amount you cannot surpass. You must discern between which purchases are “wants” and which purchases are “needs”. As much as you think that third Starbucks during the week is a “need”, it’s actually an extra $5.00 you could use to pay off debt or stick in your emergency savings account.
Here are the recommended budgeting guidelines according to the Credit Counseling Society:
In the figure below, you will notice where caps have been created for each category based on the amount spent the previous month. You will notice in Figure 1, the individual had an unexpected flat tire at the end of the month that put his account in the negative. The individual probably had to pull money out from savings in order to recover. For the next month, the cap of $100 for “Personal Care” and the cap of $300 for “Food” will prevent overspending.
Step 4: Create a master budget.
The longer you track your expenses, the better idea you will have of how much money you should budget per category. Some people eat out more, but spend less on personal care; other people enjoy traveling more than purchasing clothes. You can also decrease your spending in certain areas to pay off debt quicker. After a few months, you should be able to create a master budget to further assess your financial wellness.
Step 5: Keep calm and budget on.
Budgeting may be a little mundane...monotonous...etc., but, once you notice your checking account balance is never negative, your savings account is growing, AND YOUR DEBT IS DECREASING, you'll learn to love it. Are you up for the budget challenge?