Take 19: How to Budget: 7 Steps to Be the Boss of your Money
Written by Yezmin Thomas on August 4, 2017
Are you tired of living paycheck to paycheck?
Money problems keeping you up at night? Do you want to finally take control of your money? It’s time to learn how to budget!
Living on a budget will allow you to get out of debt, plan for your future money needs and become financially fit.
To lay a strong foundation for financial success we need to evaluate our money spending and saving habits.
For some of us our weaknesses can be obvious, as in too many trips to the mall. Others might struggle with bringing in enough income.
Whatever your situation is you should know that to be the boss of your money and become financially fit you need to identify both, your strengths and weaknesses, when handling the dough.
Taking control of your finances starts by creating a budget.
Also from the “Getting your Money Life Together” Series:
Step 1: Embrace living on a Budget
You are the boss of your money. You work hard to earn it. Your job is not just to spend it, you need to learn to manage it wisely. Don’t give it away! Last I checked, money ain’t free!
Just like any business runs on a budget, to live debt free and build wealth it is necessary to embrace budgeting and run our households like a business, on a budget.
I am talking about a written plan that details our every income and expense, not the kind of budget that exists only in our minds and never materializes on paper.
One thing is to know exactly how much money is coming in and how we are spending it. Another totally different thing is the “Yay! Honey, we haven’t over drafted this month..yet.” kind of budget.
We’ve all been there! And it is usually too late when you realize that you blew $500 more than you earned last month, on makeup and shoes.
Your Budget is Your Allied
Contrary to what many people think, making a budget is easy. The challenge is sticking to it and keeping track of our every expense.
Start out your budget by understanding your income and creating an Expense Report to understand your outgo.
Step 2. Understand Your Income
Write down your income including all paycheck dates and amounts. Make sure to include money coming in from real estate rentals and side hustles if that is the case. You need to know exactly how much money in total is coming in.
If you are married and have joint accounts, which I highly recommend, you need to add your spouse’s income and expenses as well to your Expense Report.
Step 3. Understand your Outgo
To figure out how much money you spend we need to create an Expense Report. This is a detailed breakdown of all your expenses, from you mortgage payment and water bill, to the pack of gum you purchased at the gas station.
I recommend that you do your first Expense Report on paper, there is a lot you can learn about your spending habits when you manually write the expenses on paper.
If you rather using Excel or a budgeting app that is fine too.
Whichever method you use, set aside about three hours to complete this task.
Creating an Expense Report
Pull together your bank, credit card statements and expense receipts from the previous month. We need all transactions from the first to the last of the month. We are going to categorize every cent, dime, nickel and dollar that you spent. Everything!
It is much easier to do this exercise if you charge all your purchases on credit or debit cards, this way you can pull your statements and see all your expenses.
In full disclosure, you should know that I do not use credit cards nor do I think that you should use them either, it is best to stick with debit cards to avoid spending money that you don’t have and getting in debt.
If you use cash for your daily expenses you will need to keep track of every purchase. If keeping track of every purchase is too overwhelming, you may want to consider using a debit card instead of cash.
Step 4. Do the Math
Once you are done categorizing every expense, add the totals in each category. What are the numbers showing you?
Did you spend more money than you make or did you have money left over?
One month I realized that I was going to the grocery store almost every other day of the week! How crazy and expensive is that? Time to do some meal planning!
My numbers also show that I spend too much money on internet, cable and cellphone services. Perhaps I need to switch providers to get a better deal!
Identify the areas where you need to cut down on expenses. Also, find the areas where you underestimated and need to allocate more.
Step 5. Plan your Budget
Your Expense Report will become your guide to budget for the following months.
Plan your monthly budget ahead of time. Use a calendar to determine how many weeks that month has and how many paychecks you will receive. If you get paid bi-weekly you should receive a couple of “extra” paychecks a year.
Organize your expenses by categories, from housing, to groceries to lifestyle expenses.
I organize mine in the following categories. Feel free to use this as a guide and add or delete categories for your budget according to your lifestyle.
Don’t get discouraged if you blow your budget on certain categories, readjust for the next month or watch your expenses more carefully. Learning to manage your money requires practice and time.
If you are in debt you will want to squeeze every cent you can from your income to pay it off. This means no more eating out and going shopping for a while.
You need to be honest with yourself here. In my post “12 Reasons Most Americans Are Broke” I talked about how becoming financially fit is very possible, but it requires a lot of work and sacrifice.
Step 6. Make Budgeting a Habit
The beauty of having a written budget is to see how much money you are really spending and on what.You can’t do this if your idea of a budget is an estimate of your income and your expenses that vaguely lives in your mind. If you cannot produce it on paper, it simply does not exist.
Now that you have this amazing information on your spending habits, use it to plan your budget before the next month starts. I have used Excel spreadsheets to keep track of my budget but recently switched to an online budgeting tool that offers a smart phone application.
I encourage you to find a system that works for you. Ideally you want to categorize expenses daily. But who has time or can remember to do that, right?
I try to do it on a weekly basis but sometimes end up “binge budgeting” at the end of the month and that is no big deal! After all, “binge budgeting” is better than no budgeting at all.
Whatever method works for you, to be the boss of your money you must make budgeting a habit!
Step 7. Stay on a Budget
Results take time. I know that budgeting can be stressful as we are pretty much programmed to think that a budget exists to limit our options to spend our money.
But on the contrary, using a budget will allow you to see where your money is being spent. As a result you will be able to allocate more to the things that you need, the ones that you can afford, and pinpoint those that are breaking the bank.
To become the boss of your money you need to learn to manage it. Where are you spending it and where are you wasting it? The more time you spend learning about your money and how to better manage it, the wealthier you will end up.
Just think about any successful athlete, they didn’t become the best by snoozing in the morning and skipping practice. They became the best by investing time in perfecting their skills to perform their best.
Budgeting is the basic skill we need to practice and master to becoming the bosses of our money.