According to Debt.org, the average debt per American Household was at a whopping $137,063. If we can compare that to the average debt in the year 2000, it was $50,971, we have an increase of 169%! Of course, this is due to a lot of factors such as student loans, credit card usage, and rising living costs. However, some of this spending is reflected in our consumer habits. According to Northwestern Mutual survey, about 40% of Millennial income is spent on discretionary cost such as clothing and entertainment. Not surprisingly Millennial credit card debt comprises 20% of total debt.
With statistics like these, one has to wonder? What ever happened to budgeting? What happened to the age-old adage of “living within your means”? We all intrinsically know that if we make less than what we’re spending, we should spend less and increase our earnings. And yet, people don’t do that! Why is budgeting so hard?
Discipline and Comfort
Before we talk about useful strategies for budgeting, we need to tackle this big issue first. Budgeting requires discipline and compromising comfort. If you can master these those behaviors, it doesn’t matter if you skip out on coffee daily, you’ll fail. Let’s examine why discipline is so important when it comes to budgeting.
Firstly, budgeting is a fancy word for plan. It’s the plan on how you will use your money. It will dictate on how you spend it, save it, and invest in it. Like any plan, it requires follow through. Just like you plan your schedule to go to the gym or study extra, it takes discipline to follow through with your plan about money.
Secondly, budgeting isn’t something that’s fun. In fact, it’s downright depressing sometimes. When organizing your money, you might notice that you might be spending more than you can afford. You might find yourself spending money on things that don’t really matter like eating out or shopping. Your budget might call for you to restrain yourself. It might call for you to stop going out on weekends or eating lunch daily.
Budgeting is more than just having a plan, it’s a whole lifestyle that requires mental fortitude. There’s another old adage that is worth repeating, “Live like no one else wants, so you can live like no one else can.”
Use only guaranteed income
Now that we know that budget is more a mental exercise than a physical one, how exactly do we go about it? It’s actually pretty simple. We start with our income from all sources. Now this is the easiest part of the budget, you just list every source of money you receive. For most people, it’s income from work or self-employment. This can also include income from investments, real estate, disability, 401k, etc.
When listing your income, make sure to use as exact numbers you can possibly find. For example, let’s say you work a job as a sales person. Your base salary is $41,500 per year. That ends up being $798.07 per week. However, since you earn commission, you have the opportunity to earn monthly commission checks in addition to your salary. Let’s say on average, you bring $1,000 dollars in commission a month, some months more or some months less. That ends up being another $12,000 per year. However, the commission you earn is solely dependent on whether you sell your product or not. It’s not guaranteed.
When planning your budget, it’s best to plan your income with guaranteed income. In the example we’ve been using, it would be best to plan your budget use the base salary and not the commission. Now you may ask yourself, “I always earn commission! Why shouldn’t I include it?” It’s because the nature of commission is that it’s not consistent. Unfortunately, life likes to through things that we seldom expect. What if one day your job decides to change the commission structure? Or what if the economy goes south and your sales go down? However, unlike commission, your base salary will remain the same.
You never want to plan your expenses with money that might or might not come to you. Its best to play it safe and plan with what you know will hit the bank account.
Planning your necessities
Now that we know how much we have to play with, we can now plan our expenses. You want to start with your fixed expenses. These are expenses that are static in nature such as your rent or car payment. List all your expenses that do not change. After you list your fixed expenses, it’s time to start listing your variable expenses. These are items like your utility bill, gas, food, etc. Since these bills in nature tend to fluctuate with your usage, it makes them harder to plan.
When it comes to these expenses, the best thing to use is a six-month average. Once you have your averages for these expenses, you’ll use that number to plan. For example, if your light bill average comes out to $100.00 per month. You’ll plan your budget with that number.
Once you have all your expenses listed and your income listed, you’ll either get really good news or bad news. The good news is if you’re spending less that what you make, you have room to save money! However, the bad news can also be that you find out you’re spending more than what you make. However, even if you’re spending more than what you make, you now know where the problem lies and begin to make room for improvements.
Cutting out waste and planning a savings goal
So, we now know how much money you earn and how much money you spend. So now it’s time to take a look at where you can start making cuts. This is where you’re going to have to make some sacrifices. If you notice you’re spending too much eating out or you’re paying for service you never use, it’s time to start eliminating these bills. The more stuff you cut out, the more money you can start saving.
Finally, when it comes to savings, there’s several ways to approach this. However, here’s the simplest way for you to save money. Take 10% of your income and save it. Simple as that. If you make $1,000 per month, save $100.00. When it comes to savings, make sure to treat it as a bill. Just like you would make sure your rent is paid, make sure to save money every month.
Now that you know the basics of building a budget, remember the two most important parts, discipline and comfort. If you don’t need it, get rid of it. Once you have a plan, stick to it no matter how tough it gets.