If you find yourself getting to the bottom of your bank account before you get to the end of the month, I can tell you three things about you without even knowing you:
- You spend about $100 or more on overdraft fees each month
- You’re regularly paying late fees on your credit cards, car loan/mortgage
- You don’t have a budget
If I have just described you, please read on. I can help you eliminate #3 in less than 20 minutes, and by extension you will eliminate #1 and #2.
Creating a budget is simple and easy. But knowing how to use your budget and sticking to it, can be difficult. So listen up, because this is the most important rule of financial responsibility: You cannot spend more than you bring home.
Overspending is exactly how people end up drowning in overwhelming debt. Having a budget will help you to manage your finances, save for a rainy day, escape debt, and avoid unnecessary expenses like late payments and overdraft fees.
To create a budget, begin with “money in” (calculate your net monthly income)
Net income is the amount you bring home each month, not to be confused with your gross income (or salary). It’s the number on your paycheck that appears after tax withholding and other deductions like health insurance. Most pay stubs provide both gross and net income information, so this should be pretty easy. If you don’t have easy access to your pay stubs, refer to your bank statements… if you have direct deposit, net income is equal to the amount of your deposit.
It’s easiest to budget on a monthly basis since most bills are paid monthly. Here is where you will have to do a little bit of math.
If you’re paid weekly…. multiple one paycheck by 4.3
If you’re paid 2x per month… multiply one paycheck by 2
If you’re paid every other week… multiple one paycheck by 2.6
If your paycheck varies significantly from week to week, you may want to gather your last 3 months of pay stubs and figure out your monthly average before you calculate.
Once you’ve calculated your net monthly income, grab a piece of paper and write it down at the top of the page.
Next, look at “money out” (calculate your total monthly expenses for necessary items)
Most of us have the same necessary expenses each month (rent, utilities, car insurance, etc.) but only you can decide what qualifies as a necessary expense (the kind you literally cannot live without). But it’s important to review and account for these expenses first, because you need to pay these first (you know, so you can live).
Now, go back to where you wrote your net monthly income, and underneath, list your monthly expenses, one by one. Then add them up at the bottom of the list. Like this:
Finally, calculate your disposable income
Subtract your total expenses from your net income, to determine your monthly disposable income.
Now that you’ve completed your budget, how do you use it? A budget is useful in many ways.
First, it forces you to take a closer look at your spending. If you arrive at a negative number when calculating your disposable income, it means you’re overspending (remember the rule: You cannot spend more than bring home.) If you’re overspending, you’ll have to make some tough decisions about where to cut back. Here is a guideline for organizing your expenses (based on net income):
30% for housing expenses (rent/mortgage and utilities)
15% for transportation (vehicle expenses or public transportation)
15% for food and personal items (groceries, cleaning supplies, toiletries, clothing)
10% for health, medical and other necessary expenses (child care, tutoring, etc.)
20% for miscellaneous or discretionary spending (cell phone, cable/internet, leisure, recreation and social activities, pet costs) (this is the first place you should look if you need to reduce or eliminate expenses)
10% for savings
= 100% SUCCESS
Second, a budget provides you with a road map to keep you on track for success. Once you calculate your disposable income, you can set aside an amount for saving each month, which will allow you to plan for future events and be prepared in case of an emergency.
When you’re ready to buy a home or a new car, you’ll have the down payment ready. If you have an emergency, you can dip into your savings instead of charging to a credit card and incurring hefty interest expenses. And, if you experience a more catastrophic event (like unemployment or illness) you’ll have the funds available to carry you through a tough time.
Savings should be left alone to accumulate, earn interest, or in some cases, for investment (such as retirement). So naturally, savings should only be used in emergencies. Otherwise, you won’t have it when you need it. Also, most banks will let you use your savings account for overdraft which will help you to avoid those expensive overdraft fees. But, beware. If you find yourself dipping into savings for your every-day needs, you’ll need to go back and re-examine your budget. At that point, you may want to compare to your bank statements and pinpoint where, exactly, you’re exceeding your budget.
In conclusion, having a budget will help you determine disposable income, which you can then allocate among miscellaneous and discretionary expenses, to stay within your means, and for savings.
Did you notice that my budget example (above) does not have a line item for debt/credit card payments? That’s because there’s no room for such a useless expense in responsible finance. If you’re spending more than 10% of your income on minimum payments, you should consider an alternative to get you back on track. Bankruptcy offers immediate relief and the fresh start you need to achieve financial freedom.
For more information about bankruptcy or any of the other matters discussed above, please call, text or e-mail for a free initial consultation. Most calls take no more than 15 minutes
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