If you read my “Investing 101” blog post, I said this would be my next post — “Budgeting 101”; because without any surplus cash you can’t invest. I have some simple steps you can follow and I may upload a simple excel spreadsheet for budgeting that I will post on my blog https://opcdnblog.wordpress.com/(if I can find the one I made a little while back).
Before you read the tips you must know when I say “afford” I do not mean that you are living paycheck to paycheck so you can “afford” everything you have, to be living an affordable lifestyle means you are living in such a way you are putting away surplus cash for retirement (or other things); because let’s face it you don’t want to work until the day you die, and neither do I. You may continue to work in your retirement years, but it should be because you love what you are doing and you should be financially stable enough that it is YOUR CHOICE to work. Well, with that out of the way — let’s get into it.
Step 1: Know your net inflow per month
This step may sound weird or obvious but I know there are people out there who, when asked how much they make, reply with “well somewhere around XXX.XX”. So, the first step to getting serious about budgeting is actually paying attention to your pay stub and realizing how much money you are netting each month (after taxes and deductions). This is basically your foundation for starting to build the budget, if you own a business or have a more complicated setup of inflows this step may take a little research and calculation; for those cases, if you have a fairly good educated guess, that should work. It would be a good idea to try to categorize these items into categories like: employment, business, investment income, etc. Write this list out in an excel spreadsheet or word document.
Step 2: Know your outflow per month
You more than likely have a couple fixed costs that come out of your bank account, or charged to your credit card each month, you should be aware of the total. This is another really important figure to calculate accurately. Now there are people probably thinking, “What about variable costs like groceries, I buy those every month but it is not always the same.” Well I would suggest looking back, or taking inventory, of about 3 months’ worth of grocery buying and take the average. To do this it may be easier to put all your groceries on your credit card and print the statement at the end of each month to add up the numbers. This method can be applied to any variable expense you may have like: heat, water, electricity, clothing, etc. Also, as in Step 1, you should categorize these into categories like: clothing, entertainment, rent, mortgage, etc. The more specific you are the more insightful the budget will be; also, I would suggest a category for unplanned expenses such as “miscellaneous”. Some examples of this would be: parking ticket, speeding ticket, car maintenance, house maintenance, etc. Again, write these lists out with the corresponding number in the same excel spreadsheet or word document as in Step 1.
Step 3: Stop and analyze
So once you completed step 1 and step 2, stop for a minute. Start to analyse the data you just collected, when you subtract Step 1 from Step 2 — is it negative? Is it positive? This will determine your current position of affordability, are you living an affordable lifestyle already and are looking to tweak it to increase your cash surplus; or, is the number negative and you are looking to start living an affordable lifestyle. If it appears you are making a surplus but have little to no money in your bank account, you may have missed something or estimated something in a manner that is too conservatively. This will determine the amount of flexibility you have with your budget and how much time you really have to spend looking at your lifestyle, which brings us to step 4.
Step 4: Strategize
Now you know how affordably you are living, it is time to make a plan. If you are living affordably, how much more money would you like to save per month? Do you know how much you need to save for retirement? Are there short term goals you are looking to accomplish? You will need to ask yourself these questions and start to come up with the numbers to answer them. Then you will have to adjust what you are spending your money on accordingly — maybe you could cut back on things like entertainment or clothing. This is really a case by case approach, you must be honest with yourself — what can you cut back on and what can you not cut back on? Typically your rent/mortgage is suggested to be no more than 1/3 of your net monthly income, why this number? I have no idea, but obviously less is better; maybe if it is feasible, it could be worthwhile to move. I would guess the typical overspending will be in eating out at restaurants, forms of entertainment, and clothing — all of which can be cut back on. Another good strategy is to also come up with an “emergency fund” which is suggested to be 3 months of your net income you are currently living on, why 3 months? I have no idea, but again it is obvious that more is better in this case, but I would caution having 10 years’ worth just sitting in cash — there could be more useful vehicles to put that money into.
Step 5: Take Action
If you complete steps 1 through 4 you are now ready to take action — everything you said you will cut out, this is now the time to prove it to yourself. Start taking lunches to work instead of buying them, start appreciating the clothes you have instead of buying new clothes all the time, maybe having 1 or 2 pairs of shoes is enough — ultimately it is up to you as to how successful your budgeting is. If you take it seriously and follow the steps, I am sure you will see an improvement; but to compound this improvement start thinking of what you can do with the saved money. Maybe in a year or two you can finance that car you wanted so you can stop taking the bus, maybe you can go on that trip you always wanted to go on, maybe your retirement looks a lot more comfy now, or start investing (this is the one I would recommend) — who knows.
That is my very quick and brief 5 step overview for budgeting, maybe it produces more questions than it answer. If it does let me know what you want to know more about; I may end up writing posts about questions you might have anyway because I like sharing my opinion and experiences with people. Some posts that come to mind after writing this one include: “Should I lease, buy new, or buy a “new to me” car” and “How much do I need for retirement?” If you find yourself interested, keep an eye out, and if you have anything to add or subtract, as always, you can contact me on twitter, email me, or contact with my through my blog — everyone is entitled to an opinion.