How to Create a Budget that Actually Sticks – the 3 Steps you are Missing
Confession – I like bringing up the word budget and watching people squirm. The eyes immediately divert from your gaze and almost always a sarcastic comment is released. Why is it considered normal for millenials to be terrible with money and live with mom and dad well into their 30s?
It does not have to be this way.
Budgets make you powerful. Why? Because you should be telling your money what to do! There are several ways to make a budget. Chances are you have already made a budget if not more but none of them have stuck. Why? Because you are missing at least 3 of the 7 steps below.
7 Steps to Making a Budget that Actually Sticks!
Step 1: Figure out WHY? – most people miss this step!
My motivation: I want to follow dreams: travel, open up businesses, open schools in remote villages all of which requires money or at least freedom from living pay check to pay check.
I found my budget didn’t last a week when I didn’t have a clear purpose for it in the first place. I realized I wasn’t getting any closer to traveling the world and was tired of living paycheck to paycheck. Maybe you need a budget because you keep getting hit with overdraft fees. Perhaps you and your husband argue constantly over money and it is causing a great deal of stress. Or you want to save for big items like a house, new car, pay off never ending student loans. Whatever your reason, you need to know it! This needs to be at the forefront of your mind because your life is going to change and you need motivation big enough to encourage the change.
Step 2: Determine your Monthly Income
The best way to do this is to look at your income from the last three months. If you do not have a steady income or live off of commission I would always make a budget based on an estimate of the minimal amount you would earn.
How much money is coming in?
Add together all sources of monthly income no matter how small!
- Take home from current job
- Side hustles (lyft, uber, blogging, etc.)
- Don’t leave anything out!
Step 3: Calculate fixed expenses:
Fixed expenses are your monthly “non-negotiables”. Meaning you have to make these payments or unpleasant things will happen like getting evicted, car repossessed, or water shut off.
Below are examples of our monthly fixed expenses:
- Rent/mortgage $900
- Utilities – (varies but you can estimate your average amount about)
- Arizona summers $150
- Non summer $60
- Car insurance $120
- Gym membership $20
- Student loan payments $arm&leg
- Phone payment $75
- Internet $40
- Car payment $150
- Life insurance $25
- Fuel – (varies but at minimum to get to work) 200
- Groceries – (varies but at minimum to survive) 350
- Tithe/Giving – 10% (this is a personal belief of ours but if you don’t give while you have a little you will never give when you have more 😉
Minimum we have to make: $__________________
I cannot emphasize how important it is to know this number! Knowing this number will help you determine if you are earning enough or if you need to make major changes to your expenses.
Step 4: Determine Discretionary expenses:
Discretionary expenses are items that are not always the same each month. For these items you are in the power seat and set the budget for each expense. This is where most people go wrong! Many have no clue just how much they are spending each month in entertainment.
Nonessential Household items:
In order to get a real handle on how much you actually spend you will need to look at the average amount spent for the last 3 months. This is when I needed to put on my big girl panties and add up how much money I wasted on Lattes and eating out these past three months. (This was a bit painful for me to be honest…. Okay, really painful). It is normal to be a bit painful, but is essential to really get a grasp on where your money is going. When I did this I realized I really underestimated how much money my husband and I spent eating out. I didn’t think we ate out that often! But it all added up fast! Once we added up the amount spent over a few months we felt a little sick to our stomach and realized we could spend our money wiser.
This doesn’t mean we stopped having any fun! On the contrary, we still enjoy hanging out with our friends but we are more conscious of how quickly things add up. Also, we have gotten better at suggesting fun outings that are free or close to it!
Step 5: Subtract your Expenses from your Income
If you received a positive number you are on track! You now need to determine where the rest of your money is going to go. This is where you give every dollar in your budget an assignment such as saving for larger items or paying off debt.
If you break even, this means you make exactly what you need to each month but does not leave you in a good position if life happens… and it will. I recommend adjusting your fixed and discretionary income by shopping around, selling cars with expensive car payments, and eliminating non-essential items.
If you get a negative number you are spending more than your earn each month. If this is the case, you need to take immediate action to cut expenses or sell items that are more than you can afford. This part… well it sucks… but trust me it is worth the peace of mind. Next, you will need to do whatever you can no matter how humbling to increase your income.
In about an hour I was able to cut our fixed monthly expenses by over $100! Our internet raised $25 dollars a month. I called them up and said that was a price I could not afford. After a 30 minute conversation I was about to save us $20.00 a month! Then, we switched our car insurance and saved another $60.00 a month. Finally, we cut a monthly shooting range membership to increase our savings to just over $100 a month! Why did I not do this sooner?!?!
Step 6: what are your goals? – This is the step you are missing!!!
Prior to completing your budget we need to determine where we want to majority of our funds to go. Budgets are not meant to be restrictive but are actually empowering! My budget is not a four-letter word but rather a “Spending Plan” that will help me achieves whatever goal I choose. Our goal is to pay off debt, we have worked hard to increase our income and lower expenses so we can through thousands at our debt each month. If you know you end goal you will be motivated to stick with it!
A) Pay off debt
- If your goal is to pay off debt fast you need to cut discretionary income and lower fixed expenses if possible.
- Next, determine how much extra a month you can put towards paying off debt.
- Finally, increase your income!
B) Save for big expenses
- Add these big-ticket items to your fixed income portion of your budget. This could include a new home, car, furniture, or traveling. For example, if I am saving for new furniture I want to buy in three months. I have determined I need to save $500 a month. I will now treat this like a bill and immediately put that away into a savings account until I can afford the purchase.
C) Live with debt the rest of my life
- Let’s be real this is not an option you need to settle for. YOU CAN DO IT!
Step 7: Implement, Monitor, and Adjust your Budget – if previous budgets didn’t work you missed this step!!!
Put a calendar reminder in your phone right now for two weeks from today. DO IT NOW! If you are married make sure to set a time that is best for both of you to discuss your progress. My husband and I set aside 30 minutes after each payday to ensure we are on track and make adjustments for holidays and additional unplanned expenses. In reality that is only an hour a month! You have an hour right?
In our very first budget meeting I realized I was completely underestimating how much we spent on groceries and over estimating our fuel costs. I also completely forgot to add in a budget for birthday gifts and presents to close family relatives. Our monthly budget hour helped us creative a realistic budget that we have stuck with for over a year!
Continue to Monitor & Review
I cannot stress enough the importance of this step! If I did not continue to monitor and adjust my “Spending Plan” it was out dated in a month. Each month brings different birthday parties, special events, and really great sales I have to say no to. Honestly, we probably would have been able to pay off more than 30,000 if we monitored our spending plan this closely. After three months of success we took our foot off the gas and got busy. Before we new it a month passed! How much did we send extra to loans that month? Nothing… It was a wake up call for us. We knew we could do great things if we stayed focus! And if we lost our focus we also knew what would happen… a whole lot of nothing. So learn from our mistakes and make a plan to monitor your budget each month.
You can do it! Download the budget I used to pay off $30,000 in under a year.
Free Budget Form Here!
Download the same budget I used to pay off $30,000 in just 11 months!!!