The easiest way to get your spending under control and start saving money is to create a budget. The biggest misconception about creating a budget is that you have to stop spending money on fun stuff, like going out to eat or going to the movies - but that’s not true! You will simply decide how much you can afford to spend on food, fun and other spending categories based on your income and spending habits and how much you will save each month.
1. Log All Expenses For 1 Month
If you use credit and debit cards to pay for all of your purchases then this will be easy as you will use the statements to find the date, amount and what the item/service was. However if you use cash for some purchases then you’ll have to start keeping all of your receipts and collect them for a full calendar month. Then using our Monthly Budget Excel spreadsheet you will log all of your expenses (item, date and amount) and your monthly income (take home pay). Here's a preview of our downloadable budget spreadsheet:
2. Categorize Your Expenses
Next in order to better understand what you are spending your money on you will need to categorize all of your expenses. These will be a little different for everyone but here are some categories you may include: home (rent/mortgage, electricity/gas, water), food, fun (movies, eating out, etc.) and auto (car payment, insurance, gas). Next you will see how much you spend in each category for the month and see how much you are saving for the month.
3. Decide How Much To Spend In Each Category
This part can be a little tricky as there are many different ways you can follow to decide how much you can spend in each category. You can simply make a list of all of your spending categories plus your savings and adjust based on what you’re currently spending. If you see that you’re spending too much on fun then try to spend $100 less on fun going forward. The goal is to increase how much you are saving each month so keep that in mind. Learn about 9 Ways You're Losing Money Without Even Realizing It to help you cut down on some expenses you have.
Instead of arbitrarily deciding how much to spend in each category you can choose a budgeting technique like the 50/30/20 Budget or the even simpler 80/20 Budget, both of which you can learn about in this article 3 Simple Budgeting Techniques To Improve Your Finances.
4. Try Out Your Budgeting Strategy
You should try whatever budgeting strategy you decided to go with for at least 1 month. If you can try it out for longer that’s even better so that you give yourself the opportunity to reach your goals. It may help to write down your strategy and goals and tell friends or family about it to help you commit to it. Measure your results by using the spreadsheet and filling it in for each month and see how close you got to your goals. Recognize that you’re making progress whether you reached your goals or not because you are being mindful of your spending and that’s an accomplishment on its own.
5. Revise Your Goals & Try Again
You should remember that creating and following a budget is a process so you may need to make changes to your strategy and revise your goals. This should be compatible with your lifestyle and instead of not spending any money you should be simply spending more responsibly. This process takes time and you may need to adjust the amounts in each spending category many times before you find a strategy that works for you and allows you to reach your savings goal. Financial freedom begins with good habits!
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