Does the thought of sitting down with your family and planning a yearly budget make you want to bolt for the front door? You’re not alone.
According to a recent study conducted by U.S. Bank, only 41% of Americans claim to use a budget. That means that the majority of us don’t. We tend to avoid creating an annual budget for all sorts of reasons, from fear of being financially restricted, to pride, to fear of failure.
First things first
“All budgets should contain two main elements,” says Sam Becker, financial writer for an investing app called Stash, “How much money you’re earning, and how much money you’re spending.”
Do the math
Begin by gathering your paystubs from the past 12 months and adding up all your net income sources. Your net income is your income minus taxes and deductions. If you have a full-time job, you may have only one income. If you freelance or have multiple income sources—say you drive for Lyft but also maintain an Etsy store—make sure to include all of them. Income can also include things like child support, social security, and interest and dividends earned from investments.
Next, review your credit and debit card statements from the past year and add up all your expenses, making sure to separate fixed expenses from variable ones. Fixed expenses are expenses that cost roughly the same amount each month, such as your rent or mortgage, car payments, or insurance premiums.
Variable (or flexible) expenses are those that occur sporadically throughout the month and vary in terms of amount, such as a groceries, restaurant bills, transportation costs, and clothing.
Start by subtracting your fixed expenses from your income and make note of that number. Now subtract your variable expenses and take a look at your results.
Find the budget that works for you
If you end up with a negative number, you’re overspending and will need to make some adjustments to your spending habits. Most likely you’ll need to cut down on your variable expenses, especially those that are “wants” rather than “needs.”
LaToya Scott of Life on a Budget recommends going through your expense list and marking your wants with a “W” and needs with an “N.” Then, start slashing your “W” entries. For example, if your cable bill is $200 each month, think about how you can cut it down, find a cheaper alternative, or even go without for a while. If you get monthly mani/pedis or pricey haircuts, try doing your nails at home or finding a more affordable salon or barber. “You want to slash until you’re able to meet all of your needs (N) without having a negative balance,” says Scott. The goal is not to make you miserable, but to find cheaper alternatives so you can get your finances out of the red.
If you end up with a positive number, nicely done! However, it’s still a good idea to prepare an annual budget to help you stay on the plus side and develop good budgeting habits. One popular method for those with a full-time salary and regular paycheck is the “50/20/30” rule, which advises separating your after-taxes income into 50% for needs, 30% for wants, and 20% for savings.
Does your income vary from month to month or come from multiple sources? If so, it’s a good idea to plan ahead as much as possible and create a fund for emergencies. SaverLife users are eligible to win prizes weekly for saving $5 or more, for taking a pledge to save some of their tax refund and for submitting photos/videos about their savings resolution. They gave away more than $40,000 in prizes last year!
Not sure how to stay on track—and motivated—once you’ve figured out where and how you can start saving? Not to worry, there’s a vast array of tools and apps, plus free yearly budget templates, that can help you with virtually every aspect of budgeting. You don’t have to go it alone; you just need to take the first step.
Be realistic and cut yourself some slack
Your first attempt at creating a budget isn’t going to be perfect. Your budget isn’t set in stone, and it’s perfectly fine to make adjustments as you go. Remember: you control your budget; it doesn’t control you. It’s simply a tool to help you manage your money and plan for a better financial future.