We all need it. The budget, the b word, that dirty word. A budget that is set up well and that is followed can be a huge asset to your financial health. It doesn’t matter if you are 16 and have your first job or 55 and getting closer to retirement, you still need a budget. Welcome to my first post in my new budget series! Setting up a budget – the first steps.
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Setting up a Budget – the First Steps
Why do we need a Budget?
So often it happens, we get to the end of the month and wonder where all of our money went. I spent how much on groceries? You need to take control of your money. You are in the drivers seat, not the cash in the bank. Telling your money where to go is the single most important step in budgeting. We all have bills and obligations, it is part of growing up and being an adult. We have goals and dreams, places we want to see, people we want to spend more time with. You can tie almost everything in with money (unfortunately, that is the reality in this day and age). So having a budget and sticking to it, which is extremely hard for some of us, is of the utmost importance, especially when first starting out.
If you are just starting out, whether with your first high school job, or you are going to college and living on your own for the first time, or you just graduated from college or trade school and have your first real adult job, you need to start you budget from day one. Failing to plan is planning to fail.
The First Steps
You need to figure your net income. You need to understand where all of your money is coming from before you can tell it where to go. Single, one job? Okay, that’s easy. Married, each partner has a job, okay, two incomes. Throw in a part time job or a few side hustles? You have a few streams of income. Write it all down. Do you have a set salary per week, bi-weekly or monthly or irregular income? Yes, a salary is so much easier to budget, but we will cover irregular income as well. NET income, not gross. You cannot spend what the federal government takes every pay period. NET income is what is left over after all of your taxes and deductions are taken out. Add it up and come up with a yearly amount and then divide by 12. That is your monthly net income. Keep that number handy.
The next step to creating a budget is to understand why you need a budget. Goals, dreams, a vacation, a lake house, those are all terrific reasons for creating a budget. So let’s start a brand new notebook (I am old-school and love notebooks) just for budgeting. Grab your favorite pen, because you are going to do a lot of writing. Yes, it is so much easier to type on the computer, but I find that if I write everything down in a notebook, it becomes real to me. Start listing all of your financial goals, vacations you would like to take. Do you want to buy a camper or a lake house? Are you dreaming about a splashy sports car or a fun summer convertible? Well, write it down.
What do these goals have to do with your budget? Well, you are going to create a path to get there. It is not going to happen overnight. Throw that idea of instant gratification out the window. It will all be worth it in the end!
Track Your Spending
Next you need to gather all of your bank statements, checking and savings. You need to have a basic understanding of where your money is already going in order to set up your budget. If you use an online bank, you may already be able to see a few categories of spending. But, that may not be a true reflection of your spending and I’ll explain why. You may do your grocery shopping at one of those big box stores and that may go into the category of “shopping” instead of “groceries”. See the problem? It has to be tweaked a little. I use YNAB, You Need a Budget for my expense tracking. I am able to go into an expense and actually break it down. For example, I spent $50 at that big red box store, but only $10 was for groceries, $10 for pet food and $30 for clothes. Get my drift? These little details matter.
Now, you need a plan. Remember that net income amount? That is how much you have to spend each month. You want to tell every dollar where to go, give it a name, give it a job. These numbers might take you by surprise at first. You make $$$$ and you spend $$, where is the other $$ going? Now, you will know. You are going to plan every dollar. You are going to be in control of your money. You will not be wondering at the end of the month, “where did all of my money go?”. I am telling you, YNAB is the best, hands down, for giving every dollar a job. I have used just about every budgeting program/app out there, and YNAB for the win!
The next post in this series, Setting Up a Budget – Budget Categories, can be found here. This next post will go over all of the possible budget categories that you may need to use in setting up your own personal budget.