5 Steps to creating and sticking to a budget

  1. Income vs Expenses

 

The first step of creating a budget is to come up with a list of ALL your expenses and the amount of income you earn in a given month.  This part is vital and it’s my recommendation that you over estimate how much you spend on variable costs like entertainment, alcohol, coffee etc.  You want the budget to work for you and I can’t tell you how many times I failed in the past by lying to myself on how much I was spending.

 

  1. Getting Into the Positive

It is vital that we create a budget where we are making more than we are spending.  If you have an unbalanced budget and are spending more each month than you make, it will lead to a life of debt with no financial freedom.  The longer we allow this to go on, the deep a hole we dig for ourselves and it can become very difficult to reverse the cycle.

How do we do this?

  1. Take a look at the “wants” in your budget: This includes things such as going out to dinners, buying a cup of coffee every morning on the way to work, bars / alcohol.  These are the easiest areas to find money we can cut out of our budget.
  2. Earning More: Do you have a job that offers overtime?  Could you get a second job?  Do you have skills that you could get paid for?
  3. At the very least, we need to get our budget to the point where the Income and Expenses are even. Ideally you would like to have a surplus which will allow us to start paying off debt, saving and investing.

 

  1.    Pay off Debt:

Having debt is the largest contributing factor as to why we are not financially free.  It can be a crippling part of our lives and you might find yourself shocked once you get all of your debt onto paper.  Don’t Panic!!  The only way out is to have a plan and then execute that plan.  My preferred plan for paying down Debt is the Snowball Technique – below are the steps and an example on how to execute this method.

  • Create a list of all of your Debt and list the lender, the amount you owe, the minimum payments you have to pay and the interest rate.
    • EXAMPLE
    • Discover   $2,300            $45.00              89%
    • Capitol One $4,000            $115.00            20%
    • Student Loans $24,056 $350.00              15%

 

  • The plan works like this, we will pay the minimum payments on all of our debts except for the one with the highest interest rate. We will pay the minimum payment + the total amount of surplus we were able to generate with our budget.  In the above example, let’s assume that we have a budget surplus of $185 per month.  We would pay $115 to Capitol One, $350 to our student loans and then ($45 + $185) $230 per month to Discover.

 

  • Once a card is paid off

 

  • Once we are able to pay off our Discover Card, we now turn our focus to our Capital One Debt. We take the $230 that was going to Discover and add it to the $115 that was already going to Capitol One Card so we will start paying $345 each month.

 

  1. Check in and adjust

 

A budget is not a set it and forget it type of thing at first, you need to be regularly checking in with your budget and adjusting as necessary.  You might realize that you really need to get your spending in check or that maybe you are doing a great job and adjust to save more.

 

  1. Keep going until all Debt has been paid off – then stay out of Debt!!!

 

Once all of our debts have been paid off, we must now stay out of debt and start using that Debt Payment money we had been paying and put it to work.  All of a sudden the $695 each month is going towards your future financial freedom instead of to financial institutions.  It is only once we get to this point that we can truly work towards our freedom.

 

Get to work on a good budget and go though the next 60 days really staying conscious of how and what your money is being spent on.  If you mess up and over spend it’s ok, just make sure that you realize it as quickly as possible and get back on track asap.  Remember that financial freedom is a lifestyle and not like a diet – keep that in mind every morning and remember how you will feel if you have true financial freedom in life.

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