Begin your Budget in 6 Steps: An Action Plan
Getting your financial house in order is no small feat! It takes time, patience and most of all, persistence. For any lifestyle change, whether it be fitness, clean eating, or really anything, the most important thing to do is not give up. You can get frustrated, you can slow down your efforts, you can do a half-ass job, but as long as you don’t quit, you can potentially cycle through low motivation and inch forward until you’re ready to commit full effort again. Below is your cheat-sheet checklist on steps to take, even when you don’t want to, to keep yourself moving toward the end goal: Financial Stability. Budgeting and Tracking your Spending are meaningless concepts if no action is taken. So get ready to make moves!
1. Track Your Spending: If you haven’t already sat down and input your accounts into a spreadsheet or software that tracks your expenses (Mint, Personal Capital) do this now. Just like assembling a new TV stand or whatever, you only have to do this once, and then you won’t have to do it again, so go knock it out and get set up!
2. List Your Fixed Bills: Write a list of your monthly bills and the amounts and due dates. These should be fixed amounts that do not change month-to-month (ex: rent, internet). You can make a separate list for any quarterly (and another for annual) expenses if you prefer, but if thats too complicated, hold off for a couple of weeks and for now, just focus on what you pay per month. You can add quarterly and annual expenses into your budget as you get more practice using the budget to guide your money.
3. Make a list of any and all debt: If you have input every single account you have into one of the Track your Spending apps, this should be easy to view in one place, but write it down separately anyway. What are your minimum monthly payments on this debt? What are the interest rates for each of these debts? When will these debts be paid off? See it all in one place. This will help motivate you when you hit step 5.
4. List Your Variable Expenses: Look at your monthly living expenses and hone in on the variable categories. What amounts change every month? Make a list of what those are (groceries, utilities, gas) and see if you can come up with some goals for the upcoming month to reduce any frivolous spending. You can use this opportunity to cancel any ongoing non-essential expenses (monthly subscriptions you don’t need, etc). Again, this will vary depending on values, and there is no right or wrong. This step simply requires honesty with self. If you acknowledge that there is room to trim the grocery budget, or cut down restaurant spending, figure out what you are willing to do. Remember you always get to be the one to make the choice, but the choice (and results) are yours. Maximize this.
5. Prioritize Your Expenses: Review all of the line items you’ve now created. Put them in order of importance: 1. Bills you need to pay to live (rent, groceries). 2. Minimum debt payments. 3. Discretionary/optional expenses. Your list may look different from mine, or anyone else’s and that absolutely makes sense. You and I value different things, so our priorities will reflect that.
6. Build Your Zero-Sum Budget: Put all the pieces together using zero-sum budgeting. For simplicity’s sake, I am going to pretend we are getting paid once a month, but of course pay dates differ for all of us and definitely modify this to suit your own situation. Start with your monthly income, and subtract essential monthly living expenses, making sure you include groceries and utilities. These are variable categories, but still essential. You can determine the average amount of what you’ve spent on these variable categories, and what you are now willing to spend, based on the previous steps. Then start subtracting minimum debt payments. After this, any amount you are left with can go toward non-essential categories that you value, starting a savings account and extra payments toward any debt you have.
Do not use the last part of Step 6 as an opportunity to fool yourself about priorities. No matter how massive your debt, start putting extra money toward it every month. Track those extra payments to bolster your motivation, and always continue to look for places where you can trim variable costs. If I can cut my grocery bill by $10, thats $10 I can either stick in my savings for an Emergency Fund, or throw toward my debt. You are carving a beautiful ice sculpture and you’ve gotta chip-chip-chip away at it. There is no inconsequential amount of money. No matter how small the amount, if you use your money wisely, you will have access to freedoms and possibilities. If its spent on fleeting, unimportant things, those possibilities aren’t on the table.
This is a simple guide to get started. I know that sometimes income isn’t enough to cover essential expenses, let alone extra payments toward anything. I also recognize that debt-payoff, boosting your savings account/Emergency Fund, and setting aside money for retirement each are topics that deserve their own post and more in-depth discussion. However, budgeting and tracking your spending is a good starting place on the journey to Financial Stability. These somewhat tedious and slightly annoying steps are some of the most important things you can do.
With any goal you want to keep, difficulties may arise. We are changing habits and patterns and its uncomfortable to try new things, or face challenges. But it can be done. Its ok if its not pretty, its ok if a ton of mistakes are made along the way, if you have to erase and start all over a couple of times, if you need to take a break (as long as you commit to returning to your task at some point), or if when you are all done, you feel like you completed a piece of artwork that belongs in a Kindergarten class. Its ok.
You’re doing something new, and its in the new and the doing where your skills get sharpened and you are building a tool kit that can serve you forever. You can’t start investing in the market, or become debt-free, or have 3-6 months of monthly expenses in the bank as an Emergency Fund, without budgeting. This is the only place to start, it is your foundation, and once you get this part down solid and strong (or even rickety and wobbly at first), you can begin to build your Financial Future on top of it.