The time is now! The time to start taking control of your financial life by crafting the ultimate weapon you need to defeat your debt! Your budget!
You are now in the mental state necessary to tackle any financial woes you have after giving significant thought to your relationship with money. You have gone through your expenses for the previous 3 months to gain an accurate picture of your spending habits, maybe even seeing places where you could already be saving. We can now put all of that hard work into action!
Budget Template
Feel free to create your own budgeting template, but for those of you who would prefer an already started budget to get you going download the one I created below:
The above template has many of the most common income sources and expense classifications already included. It is what I will be using to explain different items in the words ahead. If you look up budget templates online, you will find ones that seem extremely complicated or want you to have numbers for an entire year. I wanted to create something simple and easy to use to give you the confidence to complete your budget and not feel stuck just trying to figure out how the document works. The Budget Template attached accomplishes this goal, but you also have the flexibility to make changes and updates as appropriate to make it your own. Only you know what expenses pertain to your individual situation.
You will see that the budget template currently has 3 tabs: Summary, Income, Expenses. The Summary tab will give you a quick snapshot of whether you have a budget surplus (income is greater than expenses) or a budget deficit (expenses are greater than income). The second tab, Income, is where you will list all of the sources of money you have coming in while in the third tab, Expenses, you will list all of the various categories of spending you have going out. Let’s talk about income first.
Income
Income can range from anything from salary to alimony received. You should list everything that consistently and reliably brings cash into your bank account.
The first step is your salary. You can just include the cash that is deposited into your bank account but I believe it would be a better exercise to look at a recent pay stub that shows your gross pay, deductions, and net pay. This will give you a better understanding of where your money goes the second you earn it, from taxes to your retirement accounts.
Income Other Than Salary
Once done, move onto the section below. Do you have monthly income from any other consistent sources? If so, add them here. How about payments you receive once or twice a year, like a bonus? These are a little trickier since you can’t count on them every month. My suggestion is to not include anything like a bonus. They can be tricky to estimate and sometimes won’t come at all. If you receive a bonus then that is awesome! Obviously, I would strongly advise you to either put it towards your loans, or save it in a rainy day fund in case of emergency. Nothing helps pay down debt faster than a large payment being swiftly made.
What About Taxes?
What about a tax refund? Do you typically receive thousands of dollars a year from your state and federal government in the form of a tax refund? Do you use this to make sure you pay your bills that have been growing since your last tax return? A tax refund is NOT income. It is money that you paid the government. Money that they have been holding onto throughout the year, interest free, while you have been paying interest on your debt. This is your hard-earned money. Why should you struggle to make ends meet to finally catch up on payments when your tax refund comes in?
Take Matters Into Your Own Hands
If this sounds like you, take a look at the first section of income, your pay stub. What amount are you paying for federal taxes and what percent is that of your gross pay? Based on information released by the IRS, for the 2017 tax year, the average tax rate for people below the top 1%, so the bottom 99% of wage earners, was 11.4%. For the bottom 50% the tax rate was only around 4%. When it comes to taxes there are always exceptions but you should strive to be around those numbers. Take a look at your last years tax return and see where you fall. Divide your total taxes by your income to see what your actual tax rate was last year. You should strive to be at or slightly above that percentage, unless circumstances have changed dramatically for you in the last year.
If you are receiving a large tax refund every year, talk to the payroll department about filling out a new Form W-4 to change your tax withholding to lower the amount of tax taken out of your paycheck each month. I understand the thought behind the feeling of getting a large lump sum payment each April. Trust me, it will better serve you and your goals to receive this money throughout the year. The average refund in 2018 was $2,881. That is an extra $240 a month that could be used to pay down your debt. Who doesn’t want that!?!
Now that your income is squared away, it is time to move onto your expenses!
Expenses
It is time to put all of the preparation you did with categorizing your expenses to good use! Start by filling in your amounts into the expense categories in the template and add any categories that you deem necessary to include that aren’t already there. This is your budget so it should reflect your unique income and expense portfolio as closely as possible.
Once you complete inputting the balances, we can now start to analyze where you stand with your current income and expenses and a path forward to creating a realistic budget! First, let’s take a look at the Summary tab. Do you have a surplus or a deficit? If you have a surplus that is great! You can rest easy knowing that you have more money coming in than is going out on an average month. If you are showing a deficit, it is time for you to shine and examine your expenses to determine how you can turn that deficit into a surplus!
Expense Analysis!
Regardless of whether you have a budget surplus or deficit, go back into your expenses and give a long thought about each category. Does the spending make sense? Do you know what you bought in each category? Are you using the items or are they impulse purchases that sit around and have no use? How about your groceries? Is your fridge constantly full and food being wasted every week? Are you cooking for an army when you only have a family of 2 to feed? These are all things to consider when you are looking to find ways to save money.
Money Saved, Money Earned
We will take a deeper dive into expense categories and ways to save money in future posts but I will tell you that my wife and I spend between $80 and $100 a week on groceries. We used to spend a lot more but that all changed when we found our secret weapon, Aldi!
When we first switched from going to Price Chopper to Aldi, we decided to compare an average grocery run from each store by taking our recent receipt from Aldi and going to Price Chopper and putting the Price Chopper price next to each individual Aldi items’ price. I don’t remember the exact amounts, as this was years ago, but I do know that while we spent roughly $80 that week at Aldi, it would have cost us around $150 at Price Chopper. That is a HUGE difference that leads us to make the slightly longer drive to Aldi every weekend to do our shopping. On average, we save roughly $50 a week by just changing where we do our shopping. That adds up to $2,600 a year that we can use to achieve our financial goals and we didn’t have to give up a single thing!
Small Sacrifices, Large Dreams
Remember when you are looking at your expenses that now is not the time to rationalize things. I bet you had good intentions signing up for the monthly gym membership, but are you putting that to good use? If not, get rid of it. There are plenty of ways to be active outside of going to the gym. Do you have memberships to all of the video streaming services and cable on top of that? Do you really need all of them? We save $100 a month by not having cable. That’s $1,200 a year! Sacrifices may need to be made in the short term to reach your goals. I promise you it will be worth it when you are living your dream life!
Summary
Below is a quick step-by-step summary for you to follow during this process, starting after you finish categorizing your expenses:
- Download the Budget Template.
- Fill out the Income tab by reviewing a recent pay stub and entering in the information from there.
- Add any other income sources that you receive consistently each month.
- Fill in the Expense tab using the values that you calculated for the average of the last 3 months of your expenses. Review the Summary tab to see if you have a budget surplus or deficit.
- Go through your expense categories one by one and evaluate the number in depth. Ask yourself the following:
- What is the balance made up of?
- Does your spending make sense based on your lifestyle?
- Is the spending for a need or a want?
- What can I do to lower the expense, if possible?
That last step is the hardest. What can you do to lower your expenses. We will explore the expense categories in-depth in articles to come but your main goal is this. Separate what you need from what you want. Again, this is not a time for rationalization. We both know that you didn’t need those new shoes you bought last week. Limiting your impulse purchases is what will put you on the path to financial freedom instead of financial ruin.
Congratulations on completing your budget! You have come a long way in this short period of time and are well on your way to living the life you dream of! Before looking into the different expense categories to find ways to save money, we will take a look at the true value of every dollar and discuss wants versus needs. The battle has just begun but I believe you will emerge victorious!