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This blog is divided into 6 easy steps that I follow when it comes to budgeting. If you haven't yet, be sure to subscribe to our email list to get your budget kit for free.
Mentioning the word makes people cringe and we all know we “must” do it. Unfortunately, “most” don’t.
Having worked in the financial industry for over 20 years, no business can be successful without properly planning their finances. Why would a household be any different? It isn’t.
I’ve always considered budgeting to be your life’s road map. How you plan your journey is up to you. But like driving along Route 66 in the New Mexico summer, if you miss a gas station and the next fueling station is over 200 miles, then you have made a drastic mistake.
Finances and budgeting are no different. While we don’t like to analyze our budget because we think we are already broke or don’t want to deal with the harsh reality of living paycheck-to-paycheck, it is vital to our financial health.
Budgeting doesn’t have to be difficult. It’s a simple process if you can follow these 6 easy steps I have outlined below. Also, if you become a subscriber to our newsletter, you will receive a copy of our 2018 Budget Planner for FREE.
Let’s get started.
#1 KNOW YOUR EXPENSES
Going back to fuel station reference, not knowing your expenses is certainly to doom you for failure. You must know where every dollar is going every month. An easy way to know for sure is to print out your bank statements and credit card statements to analyze where your money was spent in that month.
Take those expenses and place them in the appropriate category in the FREE Budget Tracker. One thing most people learn from doing this exercise is they quickly learn where unnecessary expenses are being spent. It’s a very effective strategy to identify which purchased items can be avoided the next month.
#2 CREATE A BUDGET
Now that your expenses have been identified, you will want to place each expense in its appropriate category. For example, your paycheck amount is income and therefore, would be at the top of the budget labeled as “Income”. Anything can increase your bank account is one type of income in most cases. Items such as refunds I would consider as Miscellaneous.
Next, categorize your expenses such as household expenses which may include Rent, Mortgage, HOA, etc.Utilities would include electricity, gas, water, sewer, etc.
#3 TRACK YOUR EXPENSES
Once you have identified that month’s budget, you must continue this the following months to come to identify where in the budget you are overspending or under spending. Comparison research is a powerful tool because it delivers data that clearly identifies weaknesses and strengths in how you are managing your money.
When I track my budgeting, I will recognize that overspent in some categories such as spending $10 more than what is budgeted for my local coffee shop. I’ve also been known to overspend at grocery stores. We all make mistakes and what I love about budgeting is you can correct it the next month.
Another great resource that I use daily to track my spending is an app from Personal Capital. It compares your spending to last month's spending so you can quickly determine if you are under or over spending. It continues to keep me honest. You can analyze your savings, net worth, credit card debt, and much more. You can get a free version by clicking the link above.
#4 BALANCE TO ZERO
Every dollar has a home.When you budget, there should not be any money remaining from the difference in income and expenses. If you have money left over, you should direct that towards debt, savings, or retirement. Each person’s situation is different so comment below if you have any questions on this.
#5 DEBT STACKING
I love this tool and I could discuss this all day. Check out my ebook Smart Strategies to Financial Freedom where I provide a deep dive into the topic. For a short synopsis, you need to obtain the balances of all your debts and identify the balances and monthly payments.
After this, organize by which debt you can pay off the faster to the slowest. The key is freeing up capital after each debt is paid off in order to apply it to the next debt. For instance, if you have two credit cards with balances of $500 and $1,500, you can pay off the $500 faster than the $1,500.
While it may not be mathematically faster to payoff, what I have discovered is that people are not robots and psychology is a huge factor in this method. Paying off debt is a motivation booster. The faster you can mentally and visually see the debt pay off, the better you feel and more motivated you are to continue this process. So now you are taking that payment from the $500 debt and can payoff the $1,500 faster.
#6 BE ACCOUNTABLE
Most importantly, get yourself an accountable partner. You can be held accountable on Dollar Otter or find a spouse or friend to keep you in check. This can be difficult but has so many rewards.
If you struggle to keep your motivation or need further assistance, I have created a course with Udemy and using the promo code DOLLAROTTER10 you can take the course at a discounted price.
In Meagan's article, A Cash Envelope Wallet For Every Budget, she delivers several tips and highlights that may assist you while looking to manage your money one step further.