Budgeting is an important part of obtaining financial freedom. Personal finance relies a lot on your personal budgeting. The term financial freedom can mean a lot of different things to different people; however, it mostly alludes to releasing the shackles of any financial constraints, be it from student loans, health loans, car loans, or even just the absence of money in general. Budgeting helps you understand how much money you have, where that money goes with bills, expenses, debts, and savings, as well as revealing what your money isn’t going towards (like if you aren’t saving any money). Budgeting helps you track your money management.
In this blog we’ll be talking about what you need to do before you budget and the steps to budget with some resources.
The first thing you need to do is decide if you want to budget. Ask yourself if you are willing to put the time and consistency in to budgeting and keep up with your numbers. *It does not have to take a long time every time, but it will take some time out of your day, especially in the beginning when you’re assessing all your numbers.
NEXT, and I think this is one of the most important steps if not the most important, you need to understand WHY you want to budget and your goals.
Budgeting is a process and can sometimes be tedious and annoying, especially when you want to purchase something that isn’t within your budget. Knowing your why and having true meaning and purpose behind budgeting can help ground you when you’re on the verge of quitting or buying that brand new Tesla that you can’t truly afford. Your why needs to be personal to you, it can be because you want to purchase a new car, a new house, or you’re tired of being in debt. Whatever it is, just make sure your why can motivate you to push through your budgeting journey.
Once your mind is made up and you know that a. you want to budget and b. your purpose behind budgeting, then you get into the numbers of it all!
- Jot down some budgeting goals for yourself. Have you ever wanted to go a luxurious vacation and not worry about the expenses? Write it down. Do you want to pay off all of your debt? Write it down. Now when you write these goals down, be SPECIFIC! Write what day you’re going to accomplish this goal of saving/paying/investing a SPECIFIC amount.
Example: Goal: I am going to pay off all my student loans in the amount of $25,000 by December 2025
-To accomplish this pay off method, I am going to get a part time job and bring in an extra $500/month to help reach my goal.
- Make a list of all your monthly income. Document your full-time job income, any child assistance, side hustle, etc... If you do not bring in the same amount of income every month then, document your worst month of income for each form of income.
*I like to use worst case scenario’s when it comes to budgeting, to play it on the safe side and prepare for anything. As a small business owner and even someone who has side hustles, not every month is an abundant month of income.
- Make a full list of all your monthly bills, and I mean everything from rent, car note, credit card, to streaming services and subscriptions. * This can sometimes be a time consumer, especially when you haven’t looked through all your bills before.
- Tip: Check all your debit and credit card history, sometimes we have those smaller amounts that’s being subtracted that we don’t recognize (like Apple storage).
- Make a list of all your expenses. These are similar to bills but they’re not a fixed amount every month like internet or Netflix. When I refer to expenses, I think of food, gas, or even electricity (it can really fall under both expenses and bill because the number usually fluctuates). Write down all the expenses you deal with daily, weekly, monthly and jot down the worst-case scenario for that expense.
- Example: On your worst month your food budget is $500 and on your best month, your food budget is $395, write down the worst month for your expenses.
*The point of writing all your bills and expenses (in their highest form or worst numbers) is to evaluate where your money goes to later explore ways you can improve.
- After all your income, bills, and expenses are documented, subtract your bills and expenses from your income to see what discretionary income you have remaining. This number is what you should put towards your financial goal in step 1. Allocate your leftover money to your financial goal, whether it be to save, debt, concert, etc… Also this is the money you should use to pay yourself in terms of savings.
*I understand that saving money is very important and the first thing you should do is pay yourself, in the form of savings; however, I am also aware that not everyone has money after all their bills and expenses are paid for. Keep in mind, you’re trying to get a feel for what you can or cannot afford in your budget and what works best for you on your financial journey. This is your personal finance, it's personal to you.
This is your Just got started budgeting process. Now that you have made it this far, when you budget for the next month…. Yes, you should budget at least every month, if not every paycheck, you will have a better understanding of what numbers you are working with.
Also, if you don’t like the numbers you see left over in step 5 you can do 3 things:
- Lower your bills 2. Lower your expenses or/and 3. Raise your income.