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Starting a Budget

Michelle —  August 20, 2012 — 5 Comments

When someone says budget, there’s always someone out there who lets out a huge groan. But let me tell you, budgets are not always boring! If you have an end goal in mind, maybe it could even be fun to beat your goals.

A budget can help you save for different things in your life: a house, car, college, and so many other things. You can save more now, in order to have what you want later. Or you can track your budget in order to make sure that you are on the right track.

Now, I don’t specifically track each category in my budget (even though I probably should), but I do make sure that I’m spending the amount that I want/need to.

We don’t spend more than we bring in each month, and whenever we make a purchase, we think about how it’s going to affect our cash flow, money situation and so on. As long as we stay within our budgeted amount, I am happy.

When budgeting, there are many things to keep in mind, but after a while, it’ll all come very easily to you. Try not to feel too intimidated at first, as that is how it will probably feel to you if you have not budgeted before.

Steps:

Know your full income. Many people who receive their first check from their first job are shocked by the amount that they pay in taxes. Make sure that the budget you are calculating is after-tax, or you might have a big problem. Taxes eat up a big part of your income. I’ve always heard of stories of people who would buy a house, car, etc. without knowing exactly what their after-tax monthly income would be. They would just take their annual salary amount, divide it by 12 (which is another mistake because paychecks don’t easily divide like that) and buy everything off that salary.

Determine how much you want to spend. What’s your goal? Do you want to save the complete other half of your after-tax income, put 30% towards debt, or something else? Also determine how much you want to spend in each category. I’ve always heard to not spend more than 35% of your income on housing, but of course in some areas where cost of living is more expensive, this is not always possible. Right now, our housing (mortgage, property taxes, insurance, etc.) is around 15% of our after-tax income, it used to be much more though.

Be realistic. If you’re always spending 50% of your income (or some other amount) on restaurants, clothes or something else that can be considered a “want”, then do not allocate an unrealistic number such as 20% to your “fun money” budget. Be realistic about where you are spending, and then use each budget month as a way to improve your budget :)

Include entertainment in your budget. Having no “fun” money in your budget. Making a budget and saying that you will never do anything that will require money is most likely not very realistic. Include at least a little bit if you have room for it.

Check your budget once a month. See if anything needs to be adjusted (or maybe even lowered!). This is a big step when it comes to budgeting! You need to see and make sure if your budget is actually working for you. There will most likely always be something that needs to be adjusted, and maybe you can even find areas that you can decrease, or allocate to other areas.

 Why I budget:

  1. To feel financially secure. I make sure that I spend less than I bring in, and this is so that I feel in full control of my financial life and so that I feel less stressed. I want to be able to pay off my debt and retire early.
  2. Not to sound selfish, but I also budget so that I can buy what I want and feel a little less guilty when I buy things that I do want.
  3. To travel. I love to travel and by having a budget, I am able to do more of the fun things that I want to do.

  Why do you budget?