A budget is defined as a plan for the coordination of resources and expenditures. But why plan your resources (income) and expenditures (bills)? Like most of us, you already know there’s never enough money. However by taking a step back, we can change the way we look at our finances and start finding ways to make the most out of what we have. We’ve all heard the expression, “You can’t see the forest for the trees,” and setting a budget is a lot like that. It’s a way to view the big picture instead of getting overloaded with the bills that are due right now.
“Setting your budget is the foundation of building wealth. It’s like pouring a slab of concrete when you’re constructing a house; you want to make sure it’s solid or the rest of the work won’t be successful.”
- David Adefeso
How to Create a Budget
Step 1: It’s All About Timing
So you’ve decided to put together your own budget - now what? Well, the first step in creating a budget is to define your timeframe. Most people find that creating a monthly budget makes the most sense because bills come in on a monthly basis. If you want to take it even further and break things down into weekly or daily budgets - that’s just icing on the cake! After setting your timeframe, the next step is writing down the numbers.
Step 2: Money Coming In
Start by considering your overall resources per month. The biggest resource most of us have is our income. This might be hourly wages or an annual salary, but the important thing is to assess how much money that means for you per month. Be sure to take out any payroll taxes so that you write down the actual bring-home amount that you receive in total each month. Other money you might include in the resources list are things like child support, social security, and other regularly occurring support you receive. In the example below, we’ve chosen that the person is making $10/hour to make our calculations a little simpler. In an average month, this person makes about $1340 after taking out taxes.
Step 3: Money Going Out
Now comes the not-so-fun part; subtracting out your expenses. Every month, most of us have to pay similar types of bills. Use the list below as a guideline for some of the common costs to see how this example budget spends money.
That means this person has gone $200 over their budget.
Tips for Reducing Expenditures
As you can see from the example, sometimes we get into situations where our expenses are greater than our income. This can lead to overuse of credit cards, and cause us to dig deeper into debt. So if you find yourself in a hole, the most important thing is to stop digging! Let’s look at 4 easy ways this person might be able to lower their monthly expenses and try to reduce some of the overall debt.
4 Ways to Lower Your Bills
- Pay bills online: Many companies offer savings incentives to go paperless with your billing. Even if you saved a couple of dollars a month on a few of the different accounts, that could add up to more than $700 by the end of the year!
- Pay for more at a time: This one is especially true for insurance. Often these companies will give you a discount to pay for six months or an annual premium instead of monthly. While it may sound strange to ask for a bigger bill, it can also help you reduce your spending overall - see the forest!
- Negotiate with the hospital: Ultimately a hospital is a business. They would rather get some of their payment than have you default and then have to spend money with debt collectors. The most important thing is to call them immediately when you receive the first statement. By talking with them on the front end, you can often get the bill reduced and set up a payment plan that doesn’t charge interest!
- Eating at home instead of fast food/restaurants: Food is one of the most flexible ways we can save on our food expenses. Instead of spending $5-7 on a fast food lunch, bring a sandwich and chips from home for closer to $2. By doing this 5 days a week, you could shave $100 off of your monthly food expenses.
Again, putting together a budget is really about being able to visualize your finances and create a plan to improve them! It’s the foundation for building wealth, and eventually reaching the next step of being able to save.
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