This past week I wrote two articles about how in the past I made horrible decisions with my money; I took out payday loans that took me 2 years to pay off that debt and I completely mucked up my credit by neglecting my credit accounts. I seriously needed financial guidance, but instead had to learn the hard way. I wouldn’t recommend following in my footsteps on either topic. However, I’ve realized, through my own experiences, that the number one reason most people get themselves into so much trouble is that they don’t have a budget. They have no idea how much money they bring in each month or how much goes out.
So how does one create a budget after a melt down?
Obviously the first step is to sit down and look at your expenses. Most of the advice I read mentions sorting through receipts. However, I know that if you’re messing up your finances and living life on the financial edge, you probably haven’t saved any receipts. This just gives a person another excuse not to begin a budget.
So instead, my advice is to start with the basic categories: rent, utilities, groceries, car expenses. (I’ve included a link with a budgeting worksheet that I use as a guide.) Without having receipts on hand, most people can figure out how much they pay in each category. These items are also mostly necessities (with the exception of maybe the car expenses) so reducing these amounts will be more difficult.
Next, add up your debt total amounts. (You can use my debt worksheet as a guide.) Looking at the larger figure may be scary, but at least you’ll have an idea what you’re dealing with. Then, add up your minimum amounts due. Though the goal is to pay more than the minimum, you first need to figure out if what your budget will allow.
This is also a good time to analyze your habits. If you eat out everyday for lunch, add that to your budget. If you have a daily habit that costs money, such as smoking, add that up as well. These are the categories that can be adjusted if need be.
Finally, determine your total monthly income. Compare this amount to your monthly budget. You may be pleasantly surprised or realize that you’re spending too much on eating out.
If your budget shows that you have money left over after basic necessities and minimum debt payments are covered, it’s time to decide how quickly you want to pay off your debt. You may have an additional $100 per month to apply towards one debt payment, or spread it out over a few while continuing to make the minimum payments on all the rest. (This amortization worksheet is a great tool to use.)
A category that should always be included in a budget is savings. Looking at what’s left over at the end of every month shows that you really do have money that could be funding a savings account. By adding savings into your budget, it won’t be something you overlook. Now is the time to allocate a set amount each month that is set aside in a savings account. Budgeting a saved portion of your income also means that amount will actually be saved at the beginning or middle of every month, instead of hoping to save what ever is left over.
However, if your income doesn’t cover your budget, it’s time to figure out how to reduce your basic expenses or increase your income.
In a follow up post, I’ll cover some strategies on how to reduce your expenses and increase your income.
Have you created a formal monthly budget? Or do you just wing it?