Creating a Budget This video will discuss: The 7 steps to creating a budget The 50-20-30 Rule It doesn’t matter how much money you have, one of the most important things you can do to manage your money is to budget. If wrapping your arms around such a mighty task seems difficult, don’t worry. This video will provide you with step-by-step instructions on how to budget and ideas to make the act of budgeting part of your routine. Step 1- Track Your Income and Expenses It’s time to do a little journaling. Not the “Dear Diary” type, but the kind that deals with numbers. Tracking your income and expenses is best achieved with a money journal. A money journal can be a notebook and pen, a spreadsheet, or any on or offline tool that works for you. Every time you receive money, note that as income. Every time you spend, note that as an expense. Voila! Step 1 is done. Step 2 – Set Your Income Baseline We need to answer the question: “how much can we afford to spend?” Let’s find your income. The most common form will be from employment, but others could include money you’ve saved for college, family contributions, scholarships, grants, or gifts. Student loans can be considered a form of income, but they should be used sparingly and only for essential education related expenses. No credit product, like credit cards, can be considered a form of income. Jot down all your income sources, add them up, and this is your income total – also known as your baseline. Step3 – Determine Your Expenses Figuring out your monthly and annual expenses will be achieved in three ways. The first way is by looking back. Grab your last three months of checking or credit card statements and see where you spent your money. The second way is by looking forward. Budget for your fixed expenses. For example, a 12-month lease with payments of $400 a month is fixed for the next year. Other fixed expenses could include internet dues, car payments, and child care. Variable or unexpected expenses include things like groceries and utility bills. The third way to determine your expenses is achieved with your money journal. You’ll see after a few months of tracking where your money is going. Use that data to analyze your spending. Step 4 – Categorize Your Income and Expenses This step is entirely up to how detailed you want to manage your budget. If you want to budget for groceries, you could simply create an expense category for the food you purchase from grocery markets. Or, if you want more detail to your budget, you could track how much you spend on milk, meat, vegetables, desserts, and so on. Be as detailed as you’d like. At minimum, we suggest breaking your income into categories of Employment, Family Contribution, and Student Loans. And your expenses, at minimum, should include categories of Housing, Food, Transportation, Education, and Non-Essential expenses. However, if you have other large budget items, be sure to make categories for those as well. Step 5 – Compare Your Income to Your Expenses You may have learned that you should “balance” your budget which means your income and expenses should be equal. In reality, you should strive to have more income than expenses. Obviously, having more expenses than income is an unsustainable lifestyle. Think of ways to cut your expenses. Step 6 – Make Plans for Unplanned Expenses with a Cushion Building your savings is vital to keeping you financially afloat. If you have a car, you probably budget for maintenance and gas, but you might not budget for a surprise expenses like a new alternator. That is where your rainy-day fund comes in and saves the day. Your rainy-day fund is an emergency fund for unexpected expenses. Without these savings, you may have to use a credit card and that could turn into a more costly expense if you cannot pay it off right away. Step 7 – Turn Your Budget Into a Document of Freedom Many people mistakenly think their budget is going to limit their ability to spend and enjoy life. Not so! If you know that buying a new clothing item, seeing the newest movies, or getting a $5 specialty coffee really makes you happy, then make them guilt-free special occasions that fit within your budget. Now that we have the 7 steps defined, consider following the 50-20-30 rule when budgeting. 50% of your income goes to essential expenses like housing, transportation, and groceries. 20% of your income is focused on building your savings and paying off high-interest debt. 30% is for lifestyle choices; things like cell phone, entertainment, and going out to eat. Now, you’ve got the outline of a budget. Start filling in the numbers and you’ll be on your way to creating a budget.