Take a look at your most recent paychecks over the past three months.
To be on the super safe side of things, base your budget off your lowest paycheck. This will be the safest way to prepare your budget. If you happen to have a higher than usual paycheck then you are golden! The second key ingredient to setting a budget that allows you to work towards goals that get you excited, is making it clear the difference between the expenses your family can not survive without and others that are non-essential.
Simply make a list of your monthly bills and expenses, go through every single item and in all honesty, decide if your family can live with or without. This step is not categorizing your spending yet but creating a list of bills and expenses that have to be paid every month. From here, create two lists, essential expenses and non-essential expenses. Keep this closeby to use in a minute.
How we eliminated $, in debt with one simple tool
Then the cycle would continue with our next paycheck. Not a way to live at all! The key is to figuring out where you are making those mistakes. The first step to getting this problem under control is to track and categorize your current spending. There are a lot of useful tools to use online or through apps to track your spending.
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The one we originally used was Mint. Reply to this email and let me know and we can chat! If you would rather use a pen and paper to track your expenses, I have a Spending Tracker within my Budgeting Starter Kit that you can download below. If you use an online program, they connect to your bank and credit cards and you can very quickly categorize and see where your money has gone for the past three months.
If you are using pen and paper, start tracking today and see what trends you see over the next six weeks. Now take your budgeted monthly income from step 1 and compare it to your average monthly spending from step 3. Are you spending more than you are bringing in? Are you cutting it close with no room for debt payoff, savings, or maybe retirement?
This is where things start to get fun! This part of setting your budget is going to be fun! You are going to start to tell your money what to do instead of wondering where it went. What goals would you like to accomplish in the next year, five years, and ten years? Personal goals, couple goals, and family goals.
There are several categories you should be setting goals for. Again, this might look different for different families, but here are some ideas. Think short term and long term goals here. Then categorize your goals into one year, five year, and ten year goals. This will help create a timeline and make it easier to prioritize when you incorporate your goals into your budget. Under each goal, write action steps necessary to take in order to reach those goals.
Here is an example. Option 1: Work backwards. With this option you are more likely going to have to push yourself and find ways to supplement your income. This is how much per month we need to be putting into savings each month to reach this goal. Option 2: Work with what you have and work from there. We would get It is SO important to put the action steps with each goal! You now know how much money you have to work with and chances are it is not enough! The fastest way to make room in your budget is to minimize your spending.
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It is a lot easier to cut something that you are probably already over spending on then to go find a second job. Look through your spending categories from step 3 and see what areas you can cut back. Are you able to get any of your monthly bills reduced or completely eliminated? Look at every single dollar you spend and find ways to minimize that spending! It will all add up! Probably the most common room for improvement for most people is their food spending.
Pretend You Earn Less Than You Do
That included everything from daily trips to the grocery store to eating fast food. This is not an exaggeration! What goals and dreams could you start achieving with a couple extra thousand dollars a year? Yes I realize that we are all the way on step 7 and only now starting to set a budget. But that is what is going to make this budget the last time you start a budget! Most people just throw numbers on a paper and wonder why their budget keeps failing.
Not you! Not this time! The most successful way our family has found to set a budget is to allocate every single dollar of every single paycheck. What that means is that before every single paycheck, we have spend every single dollar on paper. Each penny has already been assigned a job. In order to do this, you are going to need something to keep track of your budget. Pen and paper are a classic way that works great, but our family has always used a simple excel spreadsheet.
If you are looking for a FREE tool, I have put together a Budgeting Starter Kit that includes both a free printable and the exact excel spreadsheet that our family has been using.
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You can get that free toolkit by signing up below. They will determine where you prioritize spending your money. The economy may change, industry or market conditions may change, something specific within the business may change. Regulations may roil the playing field. New entrants or competition may emerge. There may be new concepts, new partnerships, new innovations, or other internal factors with financial repercussions. There are so many things that can and perhaps should change, and yet the budget only looks at things as they were back when it was created.
Player, the lead researcher in the study, noted that this trend is increasing as market conditions become more volatile due to the accelerating speed of business. Most companies tie executive and employee compensation directly to performance against the budget. Otherwise, management will increase your budget for next year! So, what happens is that the budget, the very mantle on which the company stands, actually turns into an internal negotiation with management, a gamesmanship of sorts, where rather than developing something realistic that reflects a view of where the company is going, ends up being something largely fictitious and arbitrary.