The single most important thing an individual can do to improve their financial situation is to build a proper budget. It doesn’t matter who you are or your income level; a budget is a non-negotiable aspect of a financial plan.
Most people are intimidated by the idea of a budget. They’re afraid that they’ll either cheat on the budget, or if they stick to the budget then their life will be dull. Both of these fears diminished if you’ve built your budget properly. Here are the basics to get you started.
First, you’ll need to know your monthly income. If you work a salaried job, this is easy because your income should be the same every month. If your work an hourly or commission based job, you’ll need to do a little more work to figure out your monthly income. For people in these situations, I recommend that you use your average income minus 10%. For example, if your last two months $800 and $1200 respectively, your average income would be $1000. Budget for $900 (that’s $1000 less 10%). The reason I suggest taking off that 10% is to build in a buffer for weaker months. It’s better to budget for less and have some bonus income than to budget for more and come up short. Making up the difference using credit could cause a dangerous spiral that will make it very difficult to get a grasp on your finances for years to come.
The second step is to include your fixed expenses. These are expenses that are going to be the same every month no matter what. Things like rent, mortgage, insurance payments, etc. These are things you cannot change (without drastic lifestyle change like moving to a new place). Put those on the next line of your budget.
The final step is to put in your variable spending. This is where the real magic and discipline of budgeting comes in. These are things you can change relatively easily if you wanted to, if even by a small amount. This includes things like shopping, cell phone, cable, entertainment, and even groceries. All of these categories must be squeezed into the budget without using up more than your monthly income. You might argue, “but I have to eat, so groceries should be a fixed expense!” While its true that you have to eat, the amount you spend is controllable to a degree. You can trim your grocery budget by shopping exclusively flyer items, or using coupons, or cutting back on certain pricey items. Same with cell phone plans. In today’s modern world, a cell phone is almost a must-have, but the crazy plans that are available today are definitely not necessary. Nobody needs 500 gigs of data and unlimited nation-wide calling for $150 a month. You can choose to budget for this if you wish, or you can scale back to a $15 per month pay-as-you-go plan if a cell phone isn’t that important to you.
There is nothing “dumb” to have in a budget. You can put in anything you wish, as long as you can do so without going over your monthly income. It’s all about prioritizing what is important for you and your family. Nobody else can tell you what should be in your budget or how much should be allocated to each categories. If going to restaurants is important to you, then put that in your variable section of your budget. If you’re a big video game fan, make sure you include some game money in your budget. Life on a budget can still be exciting and entertaining, you just have to write it down!