May it be on the old fashioned ledger, on a separate notebook or on a spreadsheet on on a computer. A budget has to be neatly written down. It has to be. There is no ifs or buts about it. No matter if in debt or if there seem to be not enough income to bother with. It still has to be laid out and written down, nice and neat, to get out of debt or maintain living debt free.
Let’s do a little experiment. Name ten friends, their first and last names and their phone numbers right now without looking at your contact list.
Was it difficult? Some might even say impossible especially in this digital age when we barely train our brains to remember stuff.
Now, don’t we have at least ten different things we spend our money on in a month, if not more? All with different due dates, amounts and priority?
The whole point is to keep track of income and expenses but mostly expenses. Then from that, figure out where we bleeding money and stop it if at all possible, by either paying it off or if we can live without that expense, get rid of it.
This is a must for those who are just starting to get their finances squared away but even for those who already got this down, a nicely written down budget is still a good reference every time we need to make big purchases or life changes such as having a child, buying a house or moving to different state.
So what do we write down?
We start with income. Some get paid every month while for others, payday comes every two weeks. However often and however much, make sure to make a note on the cycle and on what week of the month it actually comes, to which the whole budget would be based on.
Then the bills. These are the ones we can’t live without and have to pay every month. Like mortgage, rent, water, power, gas, cell phone, car payments, and all that good stuff. Then the rest of the stuff we spend on, because we want to, not because we have to. These are the ones that if push comes to shove, we can live without. And these are the ones we can have fun purging first.
Now that we have all that written down. Do a quick summation. How much is left? Total all the expenses and subtracted it to the total income? If there was some left over then well and good! There is some left to invest with. If it summed up to zero, meaning the income just covers all your expenses, then that is a sign of living within the means. Now if the result is in the negative and there are way more expenses than income then it only means there are some stuff to work on. At least now there is a starting point. An actual amount to work with.
Next step is to keep track of our daily expenses. Use a small notebook to list them all down every time we spend or list them down at the end of the day. A spreadsheet on a computer or one of the multitudes of apps that are available now on smart phones are also helpful. Just make sure that the app allows a download of the list into a spreadsheet.
Do this for at least three months to find a pattern and a baseline of how much we spend and where we spend it on. I know it is a bit tedious in the beginning. Just think of as the getting to know stage. Not only do we get to know our finances, you also get to know ourselves better.