Now that you have figured out how you got here, where you are and where you want to go, its time to start getting things lined up.
The next stage is to put your spending habits on paper, create a budget and squeeze the most you can out of it.
Track Your Spending
In order to make a really good budget, you have to have some idea of where you currently spend your money.
So, you have 2 options:
- Print off your last bank statement and enter in all of the purchases into the Spending Tracker. Total everything at the bottom to see what you normally spend your money on.
- Spend the next 2 weeks tracking your spending. Enter every purchase into the spending tracker and then total everything at the bottom.
Tell me, once you’ve done this, did anything surprise you? What’s the biggest thing you learned doing this? Many people are astonished at the amount they spend eating out, or how many of those daily coffee stops can add up.
Make a Budget
Now that you have some ideas on where your money goes and how much of it is wasted or spent on things you don’t really need, you can make your first budget. This is a great post on how to create that first budget, simple and easy to follow. Start with all income sources at the top and then expenses under that. You could go really simple and just list expenses or you could put expenses under categories that match your spending tracker.
I.E. Under “Transportation”, you might have car payment, car insurance, gas, etc. Under “Food”, you might have groceries, eating out, etc.
Are you behind on bills? You can’t start saving or paying off debt until you get current on your bills. This is not the stuff that’s in collections. These are the bills that are past due but not in collections yet. Here is how to get current on your bills.
What Changes Need to Happen?
So if you are in the red with your budget, there is one of two things that needs to happen (or both): you either need to cut items out of your budget until you are in the black or you need to increase your income.
Making budget cuts is never easy or fun. I mean you deserve all of that stuff right? Well actually, the simple answer is “no” and if you keep telling yourself that you deserve stuff, then you will never win this war. Not sure what to cut? Try cable, eating out, entertainment, vacation, extra curricular activities, hobbies, internet, etc. You can also sometimes reduce items such as insurance, phone bill, and others by shopping around.
Ask yourself, “Do I really NEED this right now? Can I live without it for a while until I’m in a better place financially?”
Look at things like housing – most people recommend not spending more than 35% of your income on housing (rent or mortgage/escrow). So if you make $2000 per month ($24,000 per year), that would mean your housing needs to stay at $700 or less. CAM actually suggests no more than 30%. So at $2000 per month, that would mean housing costs of $600 or less. (Find out why)
If you rent and your housing costs are too high, its time to find a new place to rent. You might have to sacrifice a longer commute to work, but this is only temporary. If you own your home, consider selling. With home ownership, not only do you have the mortgage and escrow, but also any and every repair and replacement that comes along (hello, a roof is not cheap!). It would only take one bad luck spell to send you into a financial crisis. You want your home to be a blessing, a place where you are at peace and can rest. When you are “house poor”, the house is a curse, causing stress and discontentment.
Check out your vehicles. CAM recommends that transportation costs not exceed 15% of your monthly income, this includes insurance and gas/maintenance. Sticking with the example of $2,000 per month, that means that all transportation costs should not exceed $300. At a yearly salary of $60,000, this would give you $750 per month in transportation costs. Another opinion is that the value of all of your vehicles should not exceed 50% of your yearly income. So if you and your wife each have vehicles worth $30K and the household income is only $60,000, then you have way too much car for the money you are making and the payment you likely have is probably the biggest culprit in stealing your money each month.
If you have a car payment, and your vehicles total more than 50% of your household income, or with payments and everything, the transportation costs each month exceed 15% of your income, then its time to sell your car. Unless your spending plan includes paying off all vehicles within 18 months, then you need to sell. I know its sad to say good bye to such a loved member of the family, but Betty the Charger is literally stealing food off of your family’s table.
Remember, the sacrifices are temporary. Make a goal to buy your dream car in cash. A real goal with a set date. Decide when you will start putting money away for it, how long it will take. This will keep you motivated and take the sting out of getting rid of a prized possession.
Your first budget will be messy. You will scratch a lot out and add stuff you forgot. Your first month budgeting will likely fail. Don’t stay down! This is a learning process and it takes a little bit of time to learn new habits.
The most important thing is to make sure to set a budget every month (or weekly if you prefer). For things like gas, groceries, and anything else possible, you need to pull out cash. Separate cash into envelopes, clips, put post-its around them. Cash is so important in this process because it reunites you with your money. You actually form a relationship with it and are much more likely to keep from overspending.
Husbands and wives need to do this together. You cannot fight this war without your closest allies. You will not agree on everything, but thats what marriage is all about: compromise. Make sure each of you has a say in the budget and be willing to be flexible (no room for stubbornness).
Now that you have your battle plan (budget), and you’re current on outstanding bills, now its time for the next part: S.T.E – Emergency Fund Started.