If you don’t want to have to live on a personal budget, the smartest thing you can do is to live with a personal budget.
Even if you’re making a good salary and have no worries about covering your monthly expenses, having a personal budget will help you improve your investment, savings and other personal finance strategies. The more information you have, the better you can manage your extra money.
A budget isn’t just a list of monthly expenses and spending targets that trap you into a low-fun lifestyle. A dynamic spending and savings plan will let you avoid overspending, make sure you’re saving for things like an emergency fund and retirement, and help you have the cash for more of the enjoyable things in life.
To create a personal budget, gather last year’s credit card and bank statements, PayPal records and any other documents that you have to show what you spent last year. Look for regular spending categories you have each month. These will include:
Some of your personal expenses will be quarterly or annual, such as insurance premiums or vehicle registration. Look at last year’s spending and make sure to include any of those expenses you think you’ll have this year. Then, total up any regular monthly expenses you’ll have and divide that by 12 (months in a year). This will give you a target for monthly spending on items like groceries, utilities, entertainment and gas.
Don’t forget to skip small expenses like weekday lunches and coffee; which are easy to overlook or ignore. These things add up, as three $12 lunches per week adds up to more than $2,000 if you pay for them with a credit card and carry a balance. A $4 cup of coffee each day can cost you more than $1,100 per year if you charge your Joe.
The easiest way to create a personal budget that can easily sort, add, multiply and divide is to use Microsoft Excel. If you want a program that gives you more options and helps you prepare your taxes at the end of the year, look into a program like Quicken — which costs about $20. You can also check out these apps, some of which are free.
Enter your spending categories into a budget program. Enter the average amount you expect to pay each month for regularly recurring expenses in columns labeled “January,” “February” and so on.
Don’t average quarterly, semi-annual or annual expenses. If you’ll have two semi-annual insurance premium payments of $600 in January and June, don’t enter an average monthly insurance expense of $200 per month in each monthly column. Enter a $600 expense in January and June so you aren’t blindsided by these larger expense amounts in those months.
Add a “Total Expenses” row at the bottom of each month to see what your projected monthly spending will be for each month. Under that, include an “Income” row that lists your expected income each month. Create a formula that subtracts your expenses from your income each month to see if you break even, have a monthly shortfall or have extra cash. If you’re short or close to break even, look at what expense categories you can cut.
Whenever you spend money, record it in your budget. This might seem like a pain if you have to remember every time you buy coffee, but if you keep track of your spending, it will absolutely help you on things like:
Tracking your spending each month will let you see, in real time, how much those cups of coffee, work lunches and Nextflix rentals really cost you.
Once you’ve created a personal budget that covers your expenses, decide what to do with your extra cash. You can increase your spending in certain areas, or you can use that money to meet other goals, such as:
In a row that’s separate from your monthly expenses (not part of your budget), track your monthly credit card interest payments. You might be surprised at how little your monthly minimum card payments move the needle in reducing your debt once interest is added back in. Credit card interest is actually an expense you have each month, but because it’s added to your card balance, you don’t have to pay it each month. This is how credit card debt creeps up on you.
Create a cell that totals your monthly averages (e.g., if you have four credit cards generating interest). Divide that cell by 12 and you’ll see your total projected annual interest expense. This annual projection is enough to shock many people into making a better effort to pay down debt faster.
Don’t think of a personal budget as your mom and dad telling you that you can’t go to that concert or can’t buy that hoodie. A budget doesn’t have to restrict you, even if you do decide to financially fast for a bit. It can, instead, guide you — as long as you prepare yourself and do it right.
All images via Getty
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