My spending habits used to be out of control. I consistently found myself draining my income aimlessly by eating out, shopping, and anything else you can imagine. My checking account would hit $0 before the end of the pay cycle, forcing me to use my credit card until my next paycheck came, which would start the cycle all over again. I hated living like this, and needed something to change. So I made a budget. Budgeting can be intimidating, but I can guarantee that when it’s all said and done, you will feel much more in control of your financial situation when you see the big picture. It can really help out in escaping the spiraling paycheck-to-paycheck trap. To make things easy for you, I created a budgeting tool that I will offer to you for free. Have it sent right to your inbox by entering your email below. I would recommend reading the rest of this guide first to deepen your knowledge of how to build an effective budget:
1. Budget Time For Your Budget
I know you probably have a lot on your plate right now, but it is paramount that you set time aside to create your budget, and have time at least once a week to review your budget.
Looking at it regularly will help you stay on top of everything, and allow you to make adjustments when necessary.
Many people have trouble managing their money because they simply don’t acknowledge it and avoid it. If this sounds like you, don’t worry, You are not alone, there are many many other people that have this problem. Luckily, we are going to get out of this habit today because avoiding it is never going to get you anywhere.
If you are regularly checking your budget and your bank accounts, this alone can help you start cutting your aimless spending, and start saving more for the things that matter.
Five minutes a week is all I’m asking for.
Five minutes a week.
There are 10,080 minutes in a week, five minutes is nothing in that span.
Set a reminder on your phone, have family member, spouse, or friend help keep you accountable, or put sticky notes on your computer or mirror. Do whatever it takes; It is a small price to pay for such a big difference.
2. Start Tracking Your Expenses Immediately!
To know how much you need to budget for every month, you need to know how much you typically spend.
It’s tough to know this off of the top of your head, but luckily, technology is here to help us!
You can check out my Recommendations page for tools that I like to use, but for budgeting, you have 2 great options to help track your expenses.
1. Mint: This is what I use (unrelated the origin of Minted Millennial). Here you can hook up all of your financial accounts so that it will automatically track your expenses, and make a nice visual budget for you. I’ll write a specific post on how I use Mint, and some caveats of it.
2. YNAB (You Need A Budget): This is another very popular budgeting tool that many people use. I personally haven’t used it so I can’t speak much to it, but you can compare Mint and YNAB Here before making a decision on which to use. Both are great choices!
Once you have been tracking your expenses for a few months, it will make it a lot easier to keep an accurate budget. So don’t delay on this.
You have to know where you’ve been to know where you want to go.
3. Always Pay Yourself First
Always pay yourself first.
This saying right here is a major key.
Always pay yourself first. I can’t stress this enough. This is the millionaire investor mindset that will set you up for huge success down the road.
What does it mean?
Paying yourself first means setting aside money for your retirement, savings, and brokerage accounts before the money ever even hits your checking account. This means setting up automatic transactions to move money into those accounts every time you get paid.
Doing this is your own personal insurance that you are securing your financial future, and softens the impact of unnecessary purchases on your account.
It’s a psychology thing.
If it’s out of site and out of mind, you won’t be tempted to spend it on things you don’t need.
Pay yourself first.
If you think you don’t make enough money to do this, you need to find a way to cut expenses elsewhere to make this happen. Don’t kid yourself with excuses. It’s not the most glamorous way to allocate your income, but it will save you when you hit a crisis in your life.
Build your emergency fund first of all, at least $1,000. Then set up your retirement account(s), whether it’s a 401k through your employer, or an IRA (Individual Retirement Account). I recommend doing both for diversification purposes. These are vital steps towards financial independence.
Be ahead of the game. Pay yourself first.
4. Terminate Your Debt
In reference to paying yourself first, the amount of debt you’re in will determine how much you should pay yourself first.
What’s more important than the amount of debt you have is the interest rates on your debt.
Anything above a 10% interest rate needs to go ASAP, and should be prioritized. Still follow the Pay Yourself First method, just pay yourself a smaller amount for now so you can put a greater amount of your capital towards your debt.
There are many different ways to pay your debt down, but first off, you need to STOP ACCRUING DEBT.
Sorry. Didn’t mean to yell. I get a little worked up over these things sometimes. Anyways,
That is why you are creating this budget, so you can see how much of your debt you can pay-off per month and still have enough money to cover your basic expenses without the use of a credit card
Stop paying the minimums, and start putting as much as you can into it, especially if you’re over $10k in debt with a 10% interest rate or higher.
It won’t be easy to get out of the hole, but this is not something that you can avoid any longer. Take control. I am right there with you with my $30k of student loan debt, so let’s attack it together.
If you are already debt free, congratulations! Promise me you’ll never spend more than you make.
5. Be Realistic and Set Goals
The easiest way to ruin your budget is to set unrealistic goals. If you know you spend at least $600 every month on food and groceries, don’t set your budget for $300 in that section.
You don’t have to know exactly how much you’ll be spending, but as a rule of thumb, it’s always better to over-budget when you can so that you don’t find yourself short of money in certain areas.
This step is why it is so important to track your expenses so you know exactly how much you are spending on what each month.
Your budget is an ongoing thing. You don’t just make it and never change it again. Continuously update it to reflect spending-habit changes, income increases, or new expense types.
Setting goals can be a great way to keep it moving along, so that you can be debt-free as soon as possible and build your empire of wealth.
One of my goals this month is to cut my spending on food by $100. That money can go to overpaying my student loans.
Budget goal-setting works best with small, monthly goals that are easily managed.
Your first goal with your new budget can be to cut spending on food by $50 compared to the previous month so you can allocate it elsewhere. That is very manageable. You don’t need a groundbreaking goal every month, just change what you can be comfortable with.
Your long term goals can be to get out of debt within x amount of years, or to eventually save 20% of your income for retirement, or to put enough money in a savings account for a down payment on a house, etc. The possibilities are endless when you plan it out.
Using a combination of long term goals and short term goals will help you achieve financial freedom at your own pace.
1. Budget time for your budget
2. Start tracking your expenses immediately
3. Always pay yourself first
4. Terminate your debt
5. Be realistic and set goals
With these in mind, start making your budget right now. If you already have one, spend some time improving it and setting some goals.
For even more direction, feel free to read my Spending Roadmap: The Ultimate Guide to know exactly what you need to focus your attention on first. I include a nice spending flowchart that can be referenced in tandem with your budget.
Your journey is a marathon, and small changes here and there can go a very long way. But before you can do anything, you will need to create a stellar budget!