How to take control of your finances and create a basic budget.
Living with debt is hard, stressful and sometimes just plain depressing. However hard it may be the first step to getting out of debt is getting your finances in order. This is not a short process. Put aside an afternoon or evening, pour yourself a glass of wine and dive it.
What you’re going to need
A current copy of all of your statements. This includes bank statements, credit card statements – everything. You will want the last three months worth as well as any annual bills (like property tax).
Your pay stubs or your last tax return. You’re going to need to figure out how much money you make.
Decide how you’re going to organize everything. It’s possible to do everything on paper, on the computer with a program like Google sheets or through an online program such as Mint.com (link)
Step 1: Tackling your spending
The next stage is to go back through three months of statements and categorize your spending. If you are spending a lot of cash make sure you include a category for it. While what you’ve spent it on can’t be tracked it’s still money spent.
Remember to include any expenses which don’t appear in the three months you’re reviewing. These could be bills you have to pay once or twice a year.
Do not guesstimate your spending. For your budget to be accurate you need to know how much you are currently spending on items. Chances are it’s far more than you realize.
Once you’ve added up all your expenses, divide them by three to get your monthly average.
Step 1: Figure out your debt
Pull out all of those bill statements. Make sure you remember to include your student loans, medical bills, car loans as well as any loans from family members.
Keep in mind that there is “good” debt and “bad” debt. Consumer debt, that is, debt from buying still is the bad kind. Your mortgage would be the good kind.
Separating out your mortgage (if you had one) figure out your monthly debt repayment schedule using this method.
Step 3: Determine your income
Pull your pay stubs and/or tax returns. You’re looking for your income after tax and deductions. If your income fluctuates throughout the year you may need to add all your paystub together and divide by the number of pay periods to figure out your monthly income. Do NOT include any bonuses in your calculations. Bonuses are just that – a bonus which you can’t depend on getting every year. My husband gets an annual bonus which is based on performance. However, his company recently got a new CEO who is cutting cuts and guess which program was among the thing cut. That’s right, no bonuses anymore.
If you make tips choose the lower end of the range you usually expect. It’s better to under budget than over budget.
If you are self-employed (like me) check out my post on how to budget with a variable income.
Step 4: Create your budget
By now you should know your monthly expenses, any other big expenses which come up during the year and your income. If you’re self-employed like me you’ve figured out how you’re going to factor a variable income into your budget. And if you have any debt you’ve worked through the process of figuring out your repayment amounts to pay off your debt in three years or less.
Look at your spending report and the categories you created. Add each of those categories into your budget with your average monthly amount.
Now add in a line for an emergency savings fund and put in $100 a month.
If you don’t already have a budget line for long-term savings add that in as well. Now calculate 10% of your income (after tax) and write that number in.
Add it all up. Does it balance? If it does then congratulations. If you’re seeing a negative number at the bottom of your budget then it’s time to go to the next step.
Step 5: Making your budget balance
While not easy this step is simple. You can not spend more than you make. Period. If your budget does not balance you have two options. Either you cut spending or you make more money.
Go back to your budget and look at where you can cut expenses. Be realistic here. There’s no point cutting expenses on paper to make your budget balance if you’re not going to be able to stick to it.
Your emergency fund and savings amount are untouchable. You need those and they must stay in. The only exception is if you’re debt repayments exceed 15% of your income – at that point use some of your saving budgets to temporarily to pay off your debt faster.
Look at how you can make more money. As a stay at home mom, I do affiliate marketing on Pinterest to add to our family income. While it doesn’t bring in a huge amount it is completely flexible and doesn’t take too much time or effort.
If you’re interested you should check out my post on affiliate marketing on Pinterest for more information.