5 Easy Steps To Start A Budget

Certified Mortgage Advisor
NMLS 1701021
Published 
April 3, 2019

5 Steps to Budget

Now, I want to walk through five steps to setting up an easy-to-follow budget. All the budget is right. It's like a third-grade math problem. We're trying to see what's the money coming in. What's the money going out and how do we make sure that at the end of the month we have money left over that way we're not always living just hand-to-mouth paycheck to paycheck.

Honestly, it can be difficult and overwhelming to start a budget. It can feel like maybe we don't have enough money coming in or expenses are too much for us to handle.

What we will find out when we budget

So I want to walk through five easy steps to actually set up a budget that you can follow. That way you can start to feel like you have a little bit more control and ownership of the money that you have coming in. And I think honestly when we start to look at our budget, we start to realize that we're not so bad off as we may have thought to begin with.

Things to discuss

So let's cover an overview of the first five, and then we'll go through those ones by one. So number one is figuring out your after-tax. Step two is choosing a budgeting plan. Step three is tracking your progress. Step four is automating your savings and then step five is to revisit your budget as needed.

1. Figure out your after-tax income

So number one, let's first talk about figuring out your after-tax income and why that's important. So obviously whatever you make. As a salary or as an hourly wage is going to be an app or before your taxes, right? It's your gross income. So let's say you make a salary and it's $50,000 a year.

Your take-home pay is not going to be $50,000, right? Most of the time we're paying taxes and into social security and Medicare we're paying city or county taxes, and this helps provide all that. That we need. So your take home is going to be a lot less than you normally make hourly or sourly or salary.

So we need to figure out first, what is our after-tax income? And you might have a general idea of what that is, especially if you're hourly, you need to nail down. What's the average that you make after taxes every month. That way you can start a budget. Sometimes I'm shocked by the people who ask, how much do you make per month?

And they say I'm not. We have to know how much money is coming in. So we know how to set up a budget that creates success for us in the future. So that we're not always struggling and feeling like money is controlling us. Because it can be very easy for money to not only control the physical goods in our life but for money to control a lot of the emotional and mental capacity that we have.

And the last thing that we want is. Money to begin impacting the relationships that we're in and the quality of life that we have. So first step let's figure out what our after-tax income is. So maybe you get $5,000 a month gross, but your after-tax income, it's probably closer to $3,500 per month.

So step one, figure out what your after-tax income is.

2. Choose a budgeting plan

After that, we're going to set up our budgeting plan. A budgeting plan is as simple as this. What I want you to do is go to your bank, print off your bank statements, maybe for the past three months.

Know where your money is going

Then what I want you to do is start putting it into little buckets. Where is your money going? So how much money are you spending on gas every month? How much money are you spending in groups? How much money are you paying in rent or a mortgage payment find where all of this money is going. I think you'll start to see how terrifying it is. I know when I look back and saw how much, Chipotle I ended up having over a month, it's terrifying to see all that money add up.

But what's great about it is we can then take ownership of where the money's going once we understand how all of these things are pieces. In small things begin to add up a lot, right? Like I don't go to Starbucks often, but if you're buying lots of maybe a drink every day, that adds upright. 2, 3, 4, or $5 a day begins to add up and it's fine, but we want to make sure that money is not controlling us.

List all your expenses

So our budgeting. We want to begin setting aside and enlisting out these items that we have to pay an expense every single month. So at the end of step two, I want you to be able to say, I pay this amount of money in rent per month. I paid this amount on average and groceries per month. I paid this amount in gas every single month. Be able to understand and know exactly what's happening and write those out. So you have a comfort with.

3. Track your progress

Step three is going to be tracking your progress. I think this is what happens with a lot of budgeting is we may go through these first two steps. We might figure out what our income is. We might figure out what our expenses look like. And then we get lost in figuring out how do we actually get action out of this?

Know what's going on

So what we have to do after we figure out our income and our expenses is begin to actually track what's going on. So in step two, we figured out how much we're spending on all those items in step three. What we need to do is begin tailoring and adjusting how are we spending that money?

So we know that if on average we're spending $200 a month in groceries this month, how much have I spent so far? Do I know that when I go to the grocery? That I have a certain limit that I need to stick around and maybe I shouldn't throw that extra thing of Oreos in the shopping cart if you're like me and have a weird problem with Oreos But we have to be able to track what's going on.

Use an App to track your expenses

There are a lot of apps. If you're tech-savvy and like to have apps on your phone to track what's going on, there are a lot of different tools that exist to be able to help you track your finances. I think the first thing is finding the app that you use with your bank. Most big banks have apps that allow you to track money coming in and money going out. Use that first to figure out where your money's going.

Simple

I really enjoy an app called Simple. What it allows you to do is envelope-style banking online. So at the beginning of every month, what I can do is I can set aside a little bucket and put in all my money for that month for gas. Then what happens is I go to the gas station, I pay for gas and I pull it just out of that little bucket.

Then at the end of the month, I can see that I go over that limit, or do I have some leftovers, and how can I adjust my budget from there?

Mint

Another tool that might be helpful is one called Mint. It's made by Intuit and it will sync up with your bank account and then show me. History of your spending and then how you allocate your budget. So how much do you spend on gas or food or eating out or entertainment? It will give you all of that at a glance and makes it so you don't have to track it yourself.

4. Automate our savings

After that number four is we want to automate our savings. So at this point, we know how much money is coming in. We know how much money is going out. We're tracking it to make sure that we're not going out of bounds. We're not spending too much money all the time.

Saving isn't about controlling your life

Now, what we want to do is make sure that we continue to set money aside automatically. So we don't have to think about it. And again, one of the best ways to do this is there are several apps that allow you to save money, track money, and make sure that money isn't controlling your life. But you get to have a little bit more. Power and influence over the way that you spend your money and ultimately the way that you end up living your life.

Why we need to automate

Another option might be to have part of your paycheck contributed towards your employer's retirement plan. So maybe they have a 401k set up for you. Maybe they even do a match. So that might be a great way for you to save. The reason we want to automate is that naturally, as people, it's difficult for us to do the things that we know we need to do. So we have to set up tools and systems that allow us to make sure that we're staying in line with our goals in the best way to do that really is to automate our savings.

So again the bank simply allows me on an app to set aside money every single month automatically.  it's going to auto withdraw from my account to make sure that I'm meeting my savings goals without even having to think about it. And it takes the emotions out of the situation too, right? When we're actively transferring money from checking into a savings account or from checking to paying off debts it feels taxing, but if we can do it automatically, it takes a little bit of the emotional weight out of it and helps put us in a better position in the future.

5. Revisit your budget as needed

Then number five is to revisit your budget as needed. Once you set up your budget, it's not going to last super long, right? Because things change in life. Our family dynamic changes. Sometimes our income changes. If you're on a salary, it's always going to be pretty strict, unless you could have res if you're working hourly, maybe you have overtime or you're working holiday hours, or maybe you got sick a week and it's lower.

We have to make sure that we have flexibility in our budget and we're constantly checking back in and seeing how much income came in this month, what our expenses are like. Then is everything meeting alongside the budget that we created.

Allocate your money, know where it's going

Now, a helpful rule that I've seen other people put out there to just begin, figuring out how do we allocate this money? How much should be going towards.

50 % Needs

Our needs, how much should be going towards our wants? How much should be going towards savings and debt? Are these three numbers: 50, 30, 20. So this is a really easy way for us to begin seeing are we at least on the right track with our budget. So 50% of your income should be going towards necessities. So things that are required to live your day-to-day life. Rent a mortgage, food, gas, utilities, all necessities should be 50% of your income max.

30% wants

The next 30% should want. So what are things that help you enjoy a quality life? Then there, your once can be tailored a lot towards what are some of the goals that you have that are short term, medium-term and long term. If one of your wants is to save up to invest awesomely. Take 30% of your budget and find how those fit into the one's category.

20% debt and savings

Then the 20% should be towards debt and savings. So we're going to start off. If you have debt that you're looking to pay down, start off by making sure you at least have an emergency fund. A thousand bucks is a great place to start to make sure that you have some of those extra funds in case something happens. You want to have money that you don't have to continue borrowing. If you have a lot of debt and not a lot of savings right now, and a tire blows out on the highway, you don't want to have to swipe the credit card again, to pay for a new tire.

Take that 20% start to say, do I have at least a thousand dollars in an emergency fund set up? If not, let me start with that 20% of my income going towards setting up that emergency fund. If I have that emergency fund. Great. Now I'm going to continue building up that emergency fund, but at the same time, I'm also going to start paying down as much debt as possible.

Avoid debt

Debt is just an epidemic throughout our country and we're borrowing money sometimes at 18 to 25% interest. So something even as small as a thousand dollars in debt can take forever to pay off, especially for only making the minimum payments. So this is going to be a great place to start if you're not sure where you're at with your budget.

If you're saying I want a budget, but I'm not entirely sure where to begin, this is where to start. Take your net income. So income after tax, multiply it times .5, that's your necessities, then take the net income. Then, multiply it times .3 that's for your wants and then take your net income, multiply it times 0.2, and then start using that towards savings and paying off debt.

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