If you’re looking for ways to manage your money better, you might benefit from creating a spending plan first. Budgets are great, but how do you exactly how much to budget each month? A spending plan can help you make a realistic budget; after all, a budget only works if followed right?
Creating a spending journal is a great start. It allows you to see exactly where your money is going every month. Every day for one month, write down every single expense that you incur. This includes your morning coffee, your daily newspaper, and even the can of soda you bought. When you come home from work every night, categorize each item and keep track of how much you’re spending in each category. The whole point of this exercise is to see where you can cut some of your expenses. Most people are shocked at how much all those “little things” can add up.
After keeping a spending journal for a month, you can set realistic budgets for yourself. Remember, it’s not a good idea to be too strict on yourself, because this will only demoralize you. So how do you start to construct your budget?
Your Spending Plan is the Key
First, write down all your fixed costs such as your mortgage/rent, insurance, auto payments, cable/internet bills, or student loans. Add up all your fixed costs and then subtract it from your monthly take home pay. This gives you your total discretionary income for all your spending pleasures.
The next thing that I’d like to do is set aside a fixed amount towards an emergency savings funds. I like to think of this as a fixed cost. Not only is this good for starting a savings fund, but it helps you create a tighter budget to live a little more frugal. When you’re setting a budget for food costs, ask yourself how you’re going to reach these goals. Do you plan to only eat out a few times a week? Or do you plan to start clipping coupons? Try to be as detailed as possible instead of just saying “I’ll only spend $100/week on food.”
Ultimately, the key to staying debt free is to spend less money than you make. If you stay within the boundaries of your disposable income, you’ll never have to worry about debt problems and going over your budget. It might take a while to get used to this process, but once you’re comfortable with this process it shouldn’t take you more than a few minutes to plan for the coming months.