Budgets can be like New Year’s Resolutions – we start them with the best of intentions but after a few months they kind of fall to the wayside and we cross our fingers and pray that nobody asks how we’re progressing. But the unfortunate fact is, putting your head in the sand and ignoring your budget (or lack thereof) won’t make your financial woes disappear.
For many people, it sounds incredibly restrictive to be “tied down” to a budget. I completely get that. And based on your personal financial situation, you may need to set a more restrictive budget at least for the short-term.
But those short-term restrictions will provide a much larger payoff (literally and figuratively.)
Instead of focusing on how restrictive having to stick to a budget might feel, try to imagine how freeing it will feel when you don’t have to be a slave to your debt.
When you’re not having to feel guilty about swiping your credit card to pay for a new pair of shoes, because you have the extra cash to pay for them.
Remember, short term pain for long term gain!
If you start now, focus, and get serious about organizing your finances and getting your budget in order, in the future, you might not even need a budget (although you may still want one!)
If you’re ready to makeover your budget, here are 6 easy steps that will get you started.
DIY Budget Makeover
1. Figure out your exact income
The first step in making over your budget is figuring out exactly how much money you have coming in each month. If you’re a salaried employee, this is easy. However, if you’re a freelancer or an hourly employee things can be a bit trickier.
I would suggest looking at your last 6 months of income and working out the average. And remember, income isn’t just the money you earn from your job. Any sources of income count, including money from side hustles.
(Here’s a huge list of potential side hustle ideas, if you want to start bringing in some extra cash.)
2. Sort your expenses into fixed, flexible and periodic
Expenses fall into three categories.
- Fixed expenses are the expenses that occur every month, and stay the same. Examples of fixed expenses are mortgage payments, rent, vehicle repayments, deposits into a savings account, cable bills, student loan repayments, etc.
- Flexible expenses are expenses that can change from month to month. These include groceries, gas, clothing, utilities, entertainment, etc.
- Periodic expenses are expenses that do not occur every month. Some examples of periodic expenses include taxes, birthday and Christmas gifts, vacations, property insurance. Periodic expenses can be either fixed or flexible.
3. Work out exactly how much you spend
Once you’ve determined how much money you make and what your fixed, flexible and periodic expenses are, you need to get a handle on exactly how much you spend.
The best way to do this is to sign up for free with Personal Capital. Personal Capital has a great Cash Flow Analyzer that will allow you to see exactly where your money is going. You may be surprised!
4. Control your debt
Work out what you owe, who you owe it to and what the current interest rate is on all your debt. Then construct a plan to pay it off as soon as possible. Try to commit to making extra repayments on the debt that has the highest interest rate – the sooner you pay it off, the more money you’ll save.
Credit cards and payday loans almost always carry the highest interest rates, so it’s a good idea to start with them.
One of the best ways to help control your debt is to make extra money to pay it off.
Probably the easiest way I make extra money is by using Ibotta and Ebates.
Ibotta is a free app that gives you cash back on a huge variety of groceries. It’s super easy to use (just scan the product barcode & snap a picture of your receipt – that’s it!)
One of my favorite features of Ibotta is that they’re not always brand-specific.
What I mean by that is, a lot of the time you don’t always have to buy a certain brand to get a cash rebate. For example, I recently received cash back for buying a box of cereal – it didn’t matter what kind. I also love the fact that Ibotta almost always has rebates for healthy food, like fruit and vegetables!
Here’s the link to join Ibotta (you’ll get a $10 bonus after you redeem your first rebate, and we’ll be teammates which means we can help each other get more bonuses, which = more cash!)
Another easy way to make extra money, especially if you do any online shopping, is to join Ebates.
Ebates partners with hundreds of retailers to give you cash back on a percentage of your purchase. Basically, instead of going to the retailers website directly, first you go to Ebates. Then you’ll find the retailer you’re wanting to shop at from the alphabetical list, click on the link and you’ll be taken straight to their website.
By clicking through Ebates first, Ebates will track how much you’ll spend and they’ll give you a percentage back.
Here’s the link to join Ebates (and get a $10 bonus when you make your first qualifying purchase.)
5. Think of how you can reduce your monthly expenses
Once you’ve worked out what your monthly expenses currently are, start brainstorming ways in which you can reduce them.
If you’re currently renting and your lease is about to expire, could you move into a less-expensive place to save some money?
Have you shopped around for quotes from various different insurance providers?
This post will give you some more ideas of ways to reduce your expenses and show you exactly how much money you can save each year.
6. Determine how much you’re going to save
While it’s important to pay down debt as soon as you can, it’s also imperative that you have an emergency fund, to avoid going further into debt if an unexpected event occurs.
Your emergency fund should have enough in it to cover 6 months of basic living expenses. 6 months of living expenses might sound like a lot of money, but remember, it’s “basic” living expenses.
“Basic” living expenses means the non-negotiables, i.e., rent, food, bills, etc. It doesn’t mean going out for dinner, yoga classes, etc.
One of the best places to keep your emergency fund is in a separate, online savings account, that way you won’t be tempted to spend it.
I use Capital One 360 for my online savings account. I chose them because:
- They have no fees
- There’s no minimum balance,
- They have a 0.75% interest rate which is substantially higher than the current average of 0.06%
- They offer a $25 bonus when you open your account with $250 or more (nice boost to your savings!)
Most importantly, remember that budgets aren’t “set-and-forget.”
Once you’ve completed your budget makeover it’s important that you regularly revisit it. Make sure you keep track of your spending and make adjustments when necessary.