How to Start Budgeting
At Millennial Economics we believe a good budgeting strategy is key to achieving your financial goals. If you look at those how have been successful with their money you will notice they do a great job of managing the money that comes into their household or business. In this article, we will discuss how to start budgeting in 2021. We will discuss the importance of budgeting and give you some tips on how you can master the art of budgeting yourself.
Why Is Budgeting Important?
Wealth is built by the management of the money that comes into your possession. The management of your money is what budgeting is. It is what you decide to do with the money you have. It is important because financial success doesn’t magically happen. It comes about through the strategic management of your assets - of your money.
Let’s look at two different examples.
Example 1 -
In example one we will take a look at Bob. Bob has a steady career and earns $100,000 a year. Bob has always made good money, but he has never learned how to manage it well. He remembers his mom and dad telling him to make sure he saves for a rainy day, but outside of that he has never made a habit of actively managing his money.
On the weekend bob eats out several times at expensive restaurants with his friends. He drives a brand new BMW which he leases, and he just moved into a new luxury condo. Bob doesn’t really know how much he takes home every month. He knows he makes enough to cover his bills, and if he happens to have money left over at the end of the month he will throw it in a savings account. Bob has managed to save $10,000, but he does not own any assets, have any money invested in the stock market, and has a negative net worth.
Example 2 -
In example two we will take a look at Lisa. Lisa makes $40,000 a year. Lisa is an incredibly driven individual. She hopes to be financially independent soon, but because her income isn’t larger than average she has been forced to make sure she is managing her money well. She gives herself limits on what she can spend her money on. She enjoys time with her friends on the weekends, but she limits the amount she spends going out for drinks with them. She drives an older vehicle she paid off not long after college so she has no car payment. She also recently bought a small single family home on the outskirts of town that she is fixing up to eventually sell for a profit. She is also educating herself on what good investing principles are because she would like to start investing with the extra margin she has each month. Lisa has a fully funded emergency fund and no debt other than her home because she assigns a task to every dollar she makes.
If you had to choose, who do you think will be more financially successful in 10 years, Lisa or Bob? The obvious answer is Lisa, but why is that?
From the outside, most people would probably think Bob was very financially successful. He has a nice condo and a new BMW, but below the surface, there is no substance. Bob doesn’t manage the money he earns. He spends until there is no money left - only saving when it is convenient.
Lisa on the other hand is intentional with every dollar she makes. She budgets each month and knows where all of her dollars go. Because she sticks to her budget she is able to invest every month, has a fully funded emergency fund, and is well on her way to a net worth of over a million dollars and financial independence. From the outside looking in, Lisa’s life looks very ordinary, but she is setting herself up for tremendous financial success.
Budgeting is important because it allows us to assign a task to every dollar that we make.
How To Start Budgeting
Budgeting doesn’t have to be complicated. In fact, the simpler you make it initially the more success you will have with it. Adopting a complex system can be hard, but if you strip away all of the fluff, building and following a budget can be easy. Here are a few steps you can take to get started:
Write Down Your Financial Goals - It is always best with everything you do financially to start with a goal. There has to be a “why” behind what you are doing to keep you motivated. If there is no “why” you will quickly fail. Some of your goals may be to finally establish an emergency fund, get out of debt, save for a house, become financially independent, etc. These goals will keep you motivated throughout your journey.
Establish Your After Tax Monthly Income - This process is fairly easy. Either get a paystub from your employer or look at your bank statement and figure out how much your after tax income is every month. This is the money you have to work with. This is the money you can mold! Be sure you are calculating your after tax income and not your pre tax income.
List All Your Expenses - List all of the things you have to spend money on each month. Start with just the necessities. Some of these things could include your mortgage/rent, food, utilities, internet, gas for your vehicle, medical insurance, etc. The key here is to be as thorough as possible. You don’t want to miss anything. Take some time on this step.
After you list all of your necessities, make a list of the things you purchase every month that are wants. Some of these things might include your Netflix subscription, an allocated amount for eating out, an allocated amount for new clothes, or a gym membership. It is key to not miss anything here as well. Spend some time making sure your list is comprehensive. This is the list that you may decide to take a look at and adjust by decreasing how much you spend on a given line item.
Here is a list you can use to get you started on your budget:
HOUSING
Mortgage / Rent
Home / Rental Insurance
Electricity
Gas / Oil
Water / Sewer / Trash
Phone
Cable / Satellite
Internet
Furnishing / Appliances
Lawn / Garden
Maintenance / Improvements
TRANSPORTATION
Car Payments
Auto Insurance
Fuel
Public Transporation
Repairs / Maintenance
Registration / License
FOOD
Groceries
Eating Out
ENTERTAINMENT
Video / DVD / Movies
Concerts / Plays
Sports
Outdoor Recreation
HEALTH
Health Insurance
Gym Membership
Doctors / Dentist Visits
Medicine / Prescriptions
Veterinarian
Life InsuranceAnalyze Your Margin and Assign It a Task - Once you have written down your income and totaled all of your expenses, subtract your expenses from your income and you will find how much margin you have each month.
After Tax Income - Expenses = MarginThis number will probably surprise you. Either you will realize you have much more margin than you thought and you will begin to wonder where all your extra money is going, or you will realize you don’t have hardly any margin at all. Either way, this is a great place to be. This will guide you on what your next steps need to be.
If you find that you have more margin than you expected you know you are spending on frivolous things and need to stick to the budget you just created. If you don’t have as much margin as you thought you may need to decrease some expenses like car payments, rent/mortgage, your eating out budget, etc.
Once you have established how much “margin” you have you can decide what to do with it. This will coincide with the goals you wrote down in step 1. Now you can start assigning tasks to your money that will serve the things that matter most to you. This is the fun part of budgeting. Finally, you are making progress on your goals!
Summary
Managing your budget will be an ever-changing thing. Your budget will change and morph over time. Some months you will fail and some months you will succeed. The important thing to remember is to never give up. Each month you will get better. Each month you will develop a better understanding of the things you struggle with and the things that come easy to you.
Happy Budgeting!
Continued Reading
How to Become Financially Successful in 2021
How to Start Investing in 2021 for Beginners
How to Get Out of Debt in 2021