Budgeting 101: What is a Budget?
A good budget is like an insurance policy for your finances. If you follow it, you’re sure to have money available when emergencies come up. How do I know this? A good budget has an emergency fund built in, prioritizes your spending, and has flexibility for when life happens. Creating a budget based around your personalized needs is essential for capturing your unique spending habits. No 2 budgets should be the same!
The first step in building a personalized budget is to gather together all your outgoings in the last 2 months. For some, this may be an eye opening experience in itself. Separate all your finances into categories that fit your spending. For example, you may have an eating out category and/or a mortgage category, rent, electricity, etc. Calculate based on the previous 2 months, the average amount you spend in each category. (Ex: groceries month 1: $300, groceries month 2: $350, average total= $325/month)
At this point, there may be the temptation to not add categories of spending that you feel may “look bad”. I assure you that the best budgets have things like eating out, clothes shopping, and personal care built into it for guilt free spending!
Second step to building your budget is knowing how much you earn a month. This amount may vary for some of you, which is why you may need to go back 3-4 months to get a real feel for how much you are working with. Take that average and subtract your monthly expenses from that total.
No Money Left?
Find that you are spending more than you’re making? This is the reality to many people all over the globe. It can be easy to see a sale and think “I want this and I’ve got the money today for it”. But this line of thinking is what is driving you into debt. You need to cut your spending. Take whatever you are currently spending on non-essentials (clothes, going out, shopping) and cut the amount you spend in half immediately. ($500 is now $250) You cannot afford to be spending as much as you do.
Take the extra money left over each month and put it towards your highest interest debt or any debts you are behind on. Credit cards are charging ridiculous fees for you to borrow this money and the longer you take to pay, the more of your money they will ultimately get. Learn to pay with cash or to use credit cards wisely. There are many credit cards out there for people with good credit with 0% introductory offers. If you are in the position to, transfer any high interest debt to one of these cards and budget to pay it off before the end of the introductory offer. You’ll save yourself hundreds, if not thousands of dollars in interest.
Other options to pay less on your debt are consolidation loans. Check with your local bank about rates, fees, and credit criteria. Debt consolidation loans often have a much lower interest rate and allow you to combine all your payments into one. For many, this will result in paying LESS per month than before as well as less in interest over the term of the loan.
Already Cut Spending?
You’ve already cut all the expenses out you possibly can and you STILL don’t have enough money. I’m sorry to be the one to say this, but you’ll need to make more money. How? Only you know your life. Get creative. Great at making candles? Start an online business! Love teaching? Get your TEFL and teach English online! Love craft beer? Learn how to bartend! The possibilities are endless if you apply your mind to thinking about your skills. Everyone is skilled at something. Find something that motivates you and go.
Money Left Over?
GOOD! Let’s keep it that way! Do you budget for savings currently? If not, now’s the time to add this into your budget. If money is tight, this doesn’t need to be much. This is about getting into the habit of paying yourself first. A good example of a savings fund, as mentioned above, is an emergency fund. Ideally, an emergency fund should hold 3-6 months of expenses. Remember, expenses, not salary. This is why the advice above to cut spending is so important.
In 2020, we found first hand that the stability of the world health and economy can change in a moment. Financially surviving a recession will require additional money to cover for the potential loss of a job or your health. An emergency fund would kick in at this point if you were to get sick or lose your job so you wouldn’t get hit so hard waiting for something to come through.
Already Saving for an Emergency Fund?
GREAT! Are you also contributing to your 401K/Kiwisaver? If not, you’re missing out on tons of free money throughout your lifetime. In both programs, you choose a percentage of your wages (3% for example) to go towards a retirement account. The longer you have this account open and are contributing to it, the more financial security you’ll have as you get older.
In New Zealand, your Kiwisaver can even be drawn down in the case of buying your first house. In both NZ and the US, your employer will match your contributions up to a certain percentage meaning…. FREE MONEY!! And with time and compound interest, your small weekly investment can easily grow to 5x, 10x, 100x over your lifetime. If you still needed a reason to start investing? How about knowing that your contributions are taken directly from your pay so you’ll never have to worry about maintaining ongoing deposits! (But you can deposit extra if you can/want)
Other Important Budgeting Tips
As mentioned above, it’s really important to be honest with yourself about your spending habits. You won’t get ahead if you downplay how much you spend and on what. Always be looking for ways to cut spending here and there but do be sure to be authentic to yourself. For example, in my personal budget, I have money set aside each month for going out and having fun as well as eating out. I set aside a good amount for myself because I am also saving in the ways listed above. Getting to this point, for me, has been years of cutting back, finding alternatives, and planning ahead. Without a budget, I would still be on the brink of bankruptcy and stressed about finances.
The idea behind A Change for Better is holistic wellness. And it’s areas like this (financial security) that have an impact on the other aspects of our lives. Physically, you can feel stress in the body. Maybe you’re not eating properly because there isn’t enough money for food. Mentally, when you’re concerned about having food or a roof over your head, it is impossible to be in a healthy mental state. Intellectually, you’re spending your brain power on solving an issue and ruminating about the problems it’s caused. A small change, like starting a budget, would greatly impact many areas of your wellness.
Having a budget is an essential tool in your wellness journey. It provides safety and insurance when times are tough. Knowing you can afford everything in life is like having an ace in your back pocket. In a world with a ton to think about all the time, let money be one less worry.
Want more tips on how to reduce your debt? Check out our article on Getting Out of Debt Fast- Our Top 10 Methods