By this point, you should know your Net Worth, and what your Financial Freedom Number is. The Next step is creating a budget. Budgeting is the foundation of all finance and the stepping stone towards financial wellness. Budgeting is fairly simple: Gather up all your bills and subtract them from your monthly income.
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Creating A Bare Bones Budget
This budget will be straight and to the point; Subtract all your mandatory expenses from your monthly income. Don’t include credit cards or savings on this budget.
A best practice is to be conservative. If you don’t have a steady income, write in a low average. If your light bill changes from month to month, include a high average. Ideally, you would have extra money instead of scrambling to change your budget to meet a high electric bill. This will avoid you incurring overdraft charges or piling on credit card debt.
Every budget here will look different. We all have different mandatory bills we have to pay, it’s important that you don’t forget any bills, so going through your account and seeing recent payments might help.
Now that you have all your mandatory bills written down, you can see how much money you have left over every month after your mandatory bills.
My favorite type of budget is the Zero -Sum Budget. The point of a zero-sum budget is to allocate all the money that comes in so that you end up with nothing at the end of the month. There are four categories that should be added to the budget now.
The goal is to build an emergency fund with three to six months worth of bills. The Emergency fund provides good security in case of a job loss, or any other unexpected event. Pay yourself first! If you leave this category for last, you’ll figure out how to spend the rest of your money. A good practice is to see yourself as a bill.
If you have credit card debt, focus on paying them off. The interest you pay on your credit cards will always be way more than what a savings account will pay you.
Not accommodating a realistic budget for leisure is the equivalent of going on a diet where you only eat lettuce for lunch and dinner every day. It seems achievable at first, but in the long run, it will cause you to blow your budget and throw your numbers off.
This could be your monthly Amazon membership, Haircuts, Dry Cleaning, Birthday Gifts, etc. The goal is to give yourself room for one-off expenses so you don’t have to put them on your credit card with no way to pay them off.
There is no right amount to put into each of these, it becomes a matter of preference, priority, and motivation. Put more into one than other, or lean heady towards a specific category. As long as you know where your money is going, you are one step closer towards financial freedom.
After inputting all these, your remaining monthly balance, of course, should be zero.
How Is Your Budgeting Going?
The hardest part of a budget is sticking to it. I input my spending every day under each category which not only keeps me updated on how I’m doing, but it shows me what purchase I have to scale back on. It definitely takes practice to get into the habit of budgeting, but allowing yourself room for leisure spending, and creating a realistic budget, can help you stick to your budget.
Got your budget going strong? Well now is a good time to start cutting expenses. Click here to see what bills you can lower in your budget!