If you’re spending money, you have to know how much is readily available to you. Starting a budget is one of the simplest things you can do to keep track of all income and expenses. Even though it’s simple, doesn’t mean it’s easy. In simple terms it’s income -> expenses. It’s not so simple because sometimes income fluctuates week to week. Expenses change every month too, sometimes you get hit with a yearly subscription by surprise. This is why you can use the power of budgeting to help you plan so these surprises aren’t so surprising.

Income

The first step is calculating how much money you’re truly making. How much do you bring in a month on average. This is easily done by looking at your past month paychecks. Always use your after tax, net income. You want to calculate how much money you can actually spend, not how much you make before taxes. If this number changes a lot, then always assume the worst. Assume you are going to make the lowest number. Once you have your income number you can start calculating and see where it’s going.

Expenses

The second step is calculating how much money you’re actually spending. Take a look at last months bank statements. You can always use an app like Mint or Personal Capital. It will break down all your expenses into easy to see categories. If you prefer to do it the old fashioned way, pull out that pen and paper because you’ll need to make categories for all your spending. You’ll have two types of spending. Essential spending which will be the absolute minimum for you to exist. This will include things like rent, food, insurance or a car payment. Other types of spending will be discretionary expenses or in other words non-essential spending.

Income problem or Spending problem?

If your expenses are higher than your income is, you either have an income problem or a spending problem. There are two easy solutions and one is easier than the other. If you have an income problem then you can easily solve this by picking up more hours at your job, try getting another job, or asking for a raise. If you have a spending problem, all you have to do is cut down on specific categories. This is easier said than done though because we are used to a certain style of living.

How do I know if it’s truly an income problem?
If you truly can’t afford to live on the bare minimum this is when it is truly an income problem. Spending less money won’t help your situation.

How do I know if it’s a spending problem?
If you have a lot of discretionary spending and can cut a lot of your spending without it affecting your life drastically, then you have a spending problem. Usually adding more income to this situation makes it worse if you’re unable to control your spending. If you can keep your spending the same and make more money you can start saving more.

Saving

Unfortunately saving is the last thing on peoples minds when it should be the first. Setting aside money for a rainy day is always a good idea. This money isn’t for your next trip to Paris, but it’s to cover any expenses that would need to be covered incase your income stops. If you were to lose your job this money would support your lifestyle for a month or two until you get a new job. Personally saving 3 months of expenses should be a good basis, but you should never save more than a years worth of expenses. There are better ways to get more return on your money.

How can I save more?
A good method that I use is take the money out before it hits your checking account. When you get paid transfer out a small portion to a savings account then pretend that money doesn’t exist. Pretend it’s a bill that has to be paid, only that this is money you are paying yourself.

Committing

Committing to a budget is difficult, especially if you’ve never budgeted before. If you go over a category, don’t feel too bad you can always sacrifice money from other categories to make up the difference. For example if you have an “eating out” budget and you maxed it out, you can always lower it from your for example, “travel” budget.

A budget doesn’t have to be a boring and grueling process, it’s just to give you an insight of your spending and to give you more control of your life. It’s also to give you an insight of where you might be mindlessly spending too much un-necessary money. Trust me I’ve been there.

Thank you for reading and see you next week,
– Pablo