Three years ago, I was at the doctor’s office sitting in the waiting room when I was called up to the receptionist’s window and asked for my card so they could process my copay. The only problem was, I didn’t realize one would be due that particular visit. Instantly (and internally), I started panicking and thinking:
I don’t think I can pay this. There’s not enough in my checking.
Just to be sure, I logged into my online banking account to double check and was praying that maybe…just maybe… there would be enough to cover it. There wasn’t. Not in our checking, at least.
Thankfully though, I had enrolled in a program through my bank where every purchase made with my card is rounded up to the nearest dollar and the difference is deposited into a savings account. I had just enough in that account. I quickly transferred it over to my checking and paid the amount due. That crisis was averted, but we were dealing with another that was much bigger. We had no idea how to budget and were constantly stressing over whether or not we could stretch our money until the next pay day.
That time of our lives was difficult financially. We had recently gone from a two-income family to a one-income family so I could be a stay-at-home mother to our newborn daughter. It was very important to us that one parent would stay home with our children so we knew things were going to be tight. And we weren’t wrong.
We were facing a mountain of debt that seemed hopeless to overcome. We still are, though I am happy to say we are doing much better financially and are making strong strides towards paying it off (read my Destroy Debt series to learn more). On top of that, we were dealing with a few accounts in collections. It was really tough. Being a person who struggles with anxiety, I was constantly sick with worry about our financial state. I knew we needed to gain control of our finances and start digging ourselves out of the mess we were in.
Maybe you can relate to my story. Maybe you’ve been at that place where you weren’t sure you were going to be able to put gas in the car or you had to survive on peanut butter sandwiches because you had to wait until payday to go to the grocery store. Or maybe you aren’t struggling quite that much, but you still have no idea where most of your money is going. Maybe you can cover your living expenses comfortably and even shop or dine out often without worry, but you don’t have extra to pay off debt or save for a vacation or college fund.
Regardless of which scenario fits you, know that you aren’t alone. If you’re sick of feeling out of control with your finances and want to do something about it (and I am guessing you are since you’re reading this) then you have already taken the first step toward creating a better financial future for you and your family. And that’s awesome! But it doesn’t stop there. Now, you have to take action.
The best thing you can do to start controlling your money is to learn how to budget. If you not sure how to create a budget, don’t worry! I’m here to guide you through it! Rest at ease and we will get you moving in the right direction!
How To Budget
Step 1: Gather Information
Before you start to fill in your budget you will want to get the following information together so that you have everything you need to know in front of you at once.
- Bank Statements From The Last Three Months
- Pay Stubs
- Billing Statements (Utilities, Credit Cards, Loans, etc)
- Debt Balances in order from smallest to largest
Step 2: Figure Out Your Monthly Income
This step will look different to you depending on how you receive your income.
- Salary: Easy! Just list your standard monthly income number.
- Hourly: If you generally work the same number of hours each month, then you can take the average of the last three months of pay and list that as your projected income. Just total your past 3 months of income, then divide by 3 to get your average. If the amount of hours you work changes from month to month, list the amount that you are sure you will be bringing home.
- Hourly + Commission: Since commission based pay tends to be irregular, I would list the absolute minimum amount you know you are sure to make. Anything you make over that can go towards your debt or savings goal!
Step 3: Determine Your Regular Monthly Expenses
This includes items such as your mortgage/rent, utilities, phone, insurance, and loan payments. Write down what the bill is, when it is due, and how much you’ll pay that month. For utility bills like gas and electric that typically vary from month to month, take the average of the last 3 months to estimate what you will owe.
One thing to keep in mind is what time of year it is and whether or not that is going to affect the amount. For example, our home is heated by gas so it runs higher in the winter. So if it’s November and you know you will be using more gas that month, taking the average of the 3 months prior (August, September, October) will likely give you a too low average. You can use the average as a starting point but you will probably want to add a bit more to your budget for that category.
Another thing you can do is to look at the past year’s utility costs for that particular month to give you a good idea of what you will owe. We follow these same guidelines in the summer since cooling costs cause our electric bill to rise.
Step 4: Determine Food/Transportation Budget
If you are unsure of what you spend at the grocery or the gas station each month. Take a look at the last three months of your bank statement to get a good idea of the number you should start with. If necessary, overestimate the amount you will need so that you don’t find yourself in a pinch at the end of the month!
I typically budget about $500 dollars a month for groceries for my family of four and that includes lots of healthy produce and whatever meat is on sale that week.
Step 5: Create Your Fund Categories
This is where you will determine how much money you will budget for specific items such as clothing, diapers, car repairs/tires, medical deductions/copays, entertainment/family fun, etc. You don’t have to spend this money every month, but you know it is there if you need it. One great benefit to creating funds for various items each month is that you won’t disrupt your budget when for example, it is time to purchase new clothes for your growing-like-weeds children!
If you don’t use the money allocated to a fund one month, you can roll it over to the next month and gradually build that fund or you may choose to add it to a debt payment and just refund that category the next month. It’s up to you!
Step 6: Fill Out Your Budget Sheet
Now that you have all of the necessary information laid out, it’s time to transfer the information to a budget form.
Then you will need to take the total of all your monthly expenses and subtract it from your total monthly income and write down that number. When your budget is completed, your monthly income minus expenses should equal zero. You want to have a place for every dollar you earn. If it doesn’t equal zero yet, don’t worry! This is all a part of learning how to budget! We just have to make some adjustments.
If the current balance is positive, then you can increase how much you’re putting towards your emergency fund savings account (Read more about that here and here). Already have your starter emergency fund? Take what’s leftover and add it to your debt snowball!
If the current balance is negative, then you’ll need to revise your budget until you can get to zero.
If you have a negative balance, you will need to go back through your budget and see where you can cut expenses. This includes things that are non-essential like cable, a gym membership, a monthly subscription, etc. Things that you may want to have but don’t need.
Then you will want to look at your fund categories to see if you can trim them down further. You may find that you have to give up entertainment fund altogether to make your budget work, and that’s okay. You don’t have to spend money to have fun or spend quality time with your family. Reduce your clothing budget as much as you reasonably can and shop at second-hand stores to help your money go further. I know it isn’t fun to have to do this, but it’s way more important to have money for the things you need, i.e. shelter, food, basic clothing, and utilities than it is to have money for going to the movies.
If you have cut expenses and still find that you are negative, then the next step would be to negotiate lower interest rates or monthly payments. See if your utility provider offers a budget billing program where your payments from the past 12 months are averaged to give you a standard monthly payment for the next year.
Note: If you’re interested in budget billing, make sure to ask your utility provider for the full details of the program!
Look For Ways to Make More Money
Regardless of how much you reduce your budget, the best thing you can do if you are struggling to make ends meet or get out of debt is look for ways you can increase your income!
If time allows, look into getting a second job. If you’re crafty, consider selling items on Etsy. Start an in-home daycare or offer tutoring services. If you can play an instrument, consider giving lessons. Try to get creative on ways you can earn extra income because it is the most powerful tool you have when it comes to winning with money!
Our world is constantly moving toward reducing that amount of time it takes to make a transaction, so using cash seems a little dated. However, I use cash to pay for our groceries, fund categories, and our tithe. Cash is harder to spend because you actually have to hand it over to someone else to make a purchase. It hurts more to spend cash than to swipe a card. Plus, cash can’t disappear into thin air leaving you wondering where it went as is so often the case when you use a card. When you spend cash, you instantly know what it went towards!
Put Your How To Budget Knowledge Into Action
And there you have it! You are now ready to start taking control of your money with a budget! While at first living on a budget can seem like you are allowing your money to rule you, you’ll quickly find that the exact opposite happens. When you stick to a budget, you don’t have to wonder if you have enough money to your expenses because you have a plan for each and every dollar you earn. You are ruling your money. It is so liberating!
And don’t worry if you have to make adjustments because that is a part of the process. Learning how to budget and sticking to it takes a lot of practice. But I promise you, each month gets easier!
Now that you know how to budget it’s time to put pencil to paper! I created an awesome free budget worksheet for you to get started. Just click the button below to get access and download your printable! Stick with it and you will be a budgeting pro in no time!
P.S. Have awesome budgeting tips of your own? I’d love to hear about them! Comment and tell me about your great ideas below!
(NOTE: I am not a financial advisor. While I hope you find value in this post, it does not replace financial advice given by a professional. If you have financial concerns or issues, please consult with a professional financial advisor.)