“How confident do you feel about your financial future?” Since just the thought of that question makes me feel a little uneasy, I’d say not very confident. Every time I read an article telling me how vital it is to budget your money or to build an emergency fund, I get a pang of guilt. And I’m not the only one with avoidance issues.
Research suggests that while 60% of women worry they won’t have enough money to last through retirement, only one in three Americans have a detailed budget. But let’s be honest: Setting up a budget and monitoring our spending habits can be tough. We fear a budget will be restrictive and time-consuming to plan out, so it ends up on our to-do list for tomorrow, day after day. But
However, when done right, setting up a budget and getting control over your money can feel super empowering and can help you reach your financial goals with ease. Taking the time to find a budget that works for you can even help you plan for the occasional splurge (guilt-free)!
To quote My Domaine’s lifestyle editor Sophie Miura, “Drafting a budget is like going to a gym class after vacation: You know it’s going to be tough, it might make you feel a bit guilty, but it’s always worth it in the long run.”
If you’re one of the 92% of women who want to learn more about financial planning, it’s time to get your finances on track. Here’s a simple step-by-step guide — consider it a money map. Your new financial future starts here.
*I wanted to make sure I loaded this post with a lot of valuable resources that will further help you to budget your money like a pro. Feel free to click on any of the links below for more tips!*
Calculate your monthly income.
You gotta understand what you’re working with. So the first step is to find your latest paycheck to calculate your monthly income, after taxes are taken out. This is the amount deposited into your bank account after deductions like 401 (k) contributions. If your income fluctuates month to month, take a look at the past four to six months of your bank statement to create a realistic monthly estimate.
It’s also important to be mindful of whether you are paid weekly or bi-weekly. The difference can sometimes change the amount you make each month.
Evaluate your spending habits.
Now that you know how much you make each month, now it’s time to see where your hard earned cash is going. This can be an agonizing step but without cold-hard facts, you won’t be able to get a clear indication of your spending habits. I highly recommend linking your bank account(s) with a budgeting app like Mint or Personal Capital (which is what I use. Both apps automatically categorize your past expenses and you have months of spending data at your fingertips!
What you want is to create a realistic budget and this let’s you do just that. You’ll be able to really see where your money is going and figure out how much you need to dedicate towards each category in your budget. And, for me, it was the extra oomph I needed to really wise up with my money.
Tally your fixed + variable expenses.
Next, make a list of your fixed expenses. These are recurring costs that you have to pay every month that you’re locked into or they’re vital for your well-being. For most people these are things like rent, car payments, insurance, and phone bills. In my personal budget, I included an emergency fund as well which is treated the same as other essential costs. I recommend labeling each fixed expense on separate rows.
You’ll also want to make sure you don’t forget about expenses that aren’t billed regularly. These would be considered variable expenses because they are still necessary for your well-being, but they fluctuate and are more unpredictable. For instance, if you only pay oil changes four times a year, calculate the annual amount you pay, then divide by 12. Or if your utility bills fluctuate, research the total you pay in a full 12-month period, and divide by 12.
Other variables would be like your basic groceries, clothing essentials, toiletries, home/auto repairs, internet, gas, and going out with friends no more than three or four times a month (we are, after all social creates). And since these costs can fluctuate and you may spend less than you had planned, Elmblad recommends putting “that money into savings so you’re prepare for the months when a variable expense ends up being higher than the budgeted amount.”
Determine your discretionary expenses.
Now you want to chart your extra expenses. This category represents anything you spend money on for fun — Netflix, date nights/out with friends, retailer credit cards, trips to the salon, and travel. These are basically your “wants” — they’re not necessarily essential; purchases you could eliminate or delay if money was tight. (And I want to note that there is a difference between buying a new pair of pants because your old ones are worn out and impulse buying your tenth pair of booties just because. There’s a difference between going out three or four times a month and going out four times a week. The latter are discretionary expenses.) Refer back to your bank statement and think of all the ways you spend money.
The key to accurately forecasting your discretionary spending is to look at your past spending records. So if you’re not already keeping track, I definitely recommend getting a budgeting app. That way you can refer back to your past expenses by category and see which area you’re spending the most money.
Once you’ve analyzed your expenses in-depth, you’ll want to create a spending guideline. Identify the areas with the biggest financial drain(s) and ask yourself whether you could cut back on those costs in your budget.
Assess what’s left + create financial goals.
When you subtract your monthly fixed, variable, and discretionary expenses from your monthly after-tax income, you may have some money left over. Basically, monthly income – expenses (fixed / variable / discretionary) = money left over. Ideally, you should be putting this towards long-term goals, like your retirement fund or debt.
The goal is to grow your leftover income each month and make saving a priority over spending. But the problem is we have multiple needs and wants all competing for our limited resources. You just need to decide how much you want to save each month, and then decide where to cut back. You have to decide the best way to balance your current expenses and savings needs to avoid spending more than you make.
There are two ways to approach this:
- Aim to reduce all discretionary expenses by a manageable amount, or
- Highlight a few key areas of your budget that could be cut dramatically.
Evaluate your budget.
This last step is vital! Calculate what percentage of your income is put toward each area of your budget. Then, review the budget and be discerning about how you’re allocating your money. Is there a way you can better spend your paycheck? Are you happy with the amount you’re contributing to your savings?
One popular way to divvy up your budget is the 50/20/30 rule. This suggests that 50% of your income will go toward essential costs (fixed and variable expenses), 30% will be allocated to lifestyle choices (discretionary expenses), and the remaining 20% will go toward financial priorities — like paying off debt or growing your savings account.
And that’s it! Now that you’ve categorized your spending habits and assigned new financial goals, you will have a succinct budget to put into place. But don’t lose momentum!
Now it’s your turn!
The whole idea behind budgeting is that it helps you manage your money better — on your own terms — that you’re most comfortable with. And as you get a better grasp of your finances, things will ultimately change for the better. You’ll be able to set more money aside for things such as an emergency savings account, a new car, and so forth.
Now’s the time to test out your budget and see if you have set realistic limits. Use budgeting apps to track your spending and stay on top of your targets. At the end of each month, pencil in 30 minutes to look over your budget and compare it with your spending habits. This will help you determine whether or not you’re still on track. If you’re not, simply revise your budgeting strategy.
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Budgeting is a work in progress. Be sure to fine-tune your categories and goals until you have a workable, personalized guide. Then, ask yourself that question again: “How confident do you feel about your financial future?” After these five steps, you might find you have a very different response.