Throughout the month of April, personal-finance guru Ginger Dean, the creative force behind Girls Just Wanna Have Funds, will help you balance your checkbook (and emotions)— exclusively on ELLE.com.
Spend less than you earn. This is the main idea behind a budget. And if you don’t have one then you should. You may feel that it will require to sacrificing things you enjoy, however, this is not necessarily the case. In fact, a budget can give you the freedom to spend more confidently because you know exactly how much you can afford for different things. You may even be reluctant to set up a budget because you think that you’re not financially savvy or the process is too difficult to understand. This is simply not true–budgets for an individual or a family are as simple as making a list of money in, money out. Furthermore, there are a ton of different tools that make the process simple and fast. Whether you use a pen and paper or financial software, the basic process to set up your budget is always the same. Here’s how it works:
List your sources of income for the month. If you’re a dual-income household, include both your and your spouse’s earnings. Aside from your regular paycheck (after taxes), also include any other regular sources of income including dividend or interest income, rental income, pensions, social security, alimony, or child support.
Next, look back over your last few months of bank statements to help you list all of your monthly expenses. First, list all of your fixed expenses–these are the expenses you must pay, such as your mortgage, car payment, insurance, and utilities. Some of these may be the same fixed amount every month and some, such as electric, water, or groceries, may vary. After your list of fixed expenses is complete, list all the categories of your flexible spending–these are the things you have the most control over such as dining out, entertainment, and clothes shopping. For these, and other variable expenses, take an average over the past few months to get an accurate representation.
After all of your income sources and expenses are listed, take a moment to evaluate where you stand. You will find yourself in one of the following three scenarios:
Income is not sufficient to cover even your bottom line expenses. This, obviously, is the worst case scenario. If this is your situation, you need to either add some additional source of income or consider which monthly bill you can do without.
2. Income covers encumbered expenses but not flexible spending. In this situation, your basic financial needs are being met but you’re spending too much on discretionary items. The surplus of income after fixed expenses is what you have available to work with. Ideally, you should first commit a portion of this surplus to savings, then limit your flexible spending to an amount within the excess.
3. Your total income is greater than your total expenses. Obviously this is the best scenario, but even if you’re in this category, you’re not necessarily off the hook. There is always room for improvement, particularly if you have a financial goal to meet like saving for further education or a vacation. A portion of your budget should always be going toward savings, both retirement and an emergency cash fund, and it is always a good idea to periodically evaluate your discretionary spending to keep it in check.
Once your budget is set up, use your budget to dictate your allowable spending each month. Be sure to check in periodically to ensure you’re staying within your confines and to adjust as needed for added or lost income sources or expenses. While there are thousands of basic budgeting templates out there, one of my favorites is this template from Money Under 30. It’s simple, straightforward, and within minutes, you will have your bottom line.