If you don't currently follow a monthly budget, you're not alone. Nearly 60% of U.S. adults make the mistake of not having a budget in place. But without one, you're likely to spend more, save less, and run into situations where a single unplanned expense drives you into debt.
A better idea? As one of your New Year's resolutions for 2018, pledge to create a budget and stick to it consistently. And the best part? You don't need to sink an entire weekend into putting that budget together. Here's how to get it done in just an hour's time.
Step 1: Map out your monthly expenses and obligations
The point of a budget is to make sure your monthly spending doesn't exceed what you bring home in your paychecks, so the first step of the process is to list your expenses that come up each month. These might include (but certainly aren't limited to):
- Rent or mortgage payments
- Car payments and insurance
- Commuting costs
- Healthcare premiums and copays
- Food, including coffeehouse pit stops and restaurant meals
- Utilities, including gas, electricity, water, and cable
- Cellphone and data plans
- Dry cleaning, grooming, and other personal upkeep costs
- Student loan payments
- Other debt payments, such as those owed on a credit card
- Leisure activities
Now it'll probably only take you a few minutes to jot down these various categories by memory, but take a little time -- say, 30 minutes or so -- to comb through your bills and bank statements so you arrive at an accurate estimate for each line item. If, for example, your electric bill cost $75 last month but averaged $250 in July and August when you were constantly using air conditioning, estimating it at just $75 will throw your entire budget off. You'll need to figure out your average spending on the above categories and go with those numbers instead.
Step 2: Factor in one-time expenses that might otherwise trip you up
It's easy to come up with a list of monthly bills you're used to paying. But what about those expenses that only come up once a year, like life insurance, or renewal of a professional license? If you don't factor in those one-time expenses, you risk coming up short anytime one comes due.
So while you're reviewing your records as in the step above, make a note of those once-a-year bills and what they cost in total, divide that figure by 12, and stick it in a category labeled "miscellaneous." Then, any month you don't spend money in that category, set aside the amount you've allocated (you can stash it in savings) so that when those bills do pop up, you'll have the money to cover them.
Step 3: Figure out if you have room for savings
The next step should really only take a minute or two, because it's a matter of basic math. Once you determine how much money you need each month to pay your living costs, subtract that total from your take-home pay and look at the remainder. If it's negative, you're in trouble, and you'll need to follow the fourth step below.
If it mostly looks good -- you're able to save 10% or more of your paychecks each month -- then you might still consider the next and last step on our budgeting journey. But if you don't, you can rest assured that you're doing a decent job.
Step 4: Decide where you'll cut corners
The purpose of a budget is to help you manage your money and avoid overspending, so if your numbers in step three don't look promising, it's time to start trimming the fat. It shouldn't take you more than a couple of minutes to run through your list and determine which expenses are nonnegotiable, like your rent payment, and which have wiggle room.
From there, it's really a matter of figuring which of your flexible expenses are the least likely to impact your happiness if they get cut. If you love getting your morning latte at the local coffee shop, and forgoing it is apt to make you miserable on a daily basis, you can find a different cost to slash -- like that gym membership you only use a handful of times each month, or that upgraded cable package with premium channels you never seem to end up watching.
Of course, if you find that your monthly spending well exceeds what you bring home in your paychecks, you may need to consider more drastic changes, like downsizing your apartment or giving up a vehicle. But you'll wind up in a better financial position for it.
Don't forget to review
You can easily create a budget in 60 minutes or less. But once you have one in place, promise yourself to review it throughout the year to ensure that it remains accurate. If you create a budget in January and you pay off your car in April, that's one less expense eating up a chunk of your income. On the flip side, if your health insurance provider changes midyear and your out-of-pocket costs go up $40 a month, that's something you'll definitely need to account for. Your budget shouldn't be a static document; the more you review it, the better it'll serve you.