This week we are going to create a personal budget for ourselves. Many of us have tried to do this multiple times and have failed to either keep going or keep up with our insanely difficult restrictions which we put on ourselves. So we are going to try it for one week and see how it goes. I don't want everyone to be so extremely strict so you are destined to fail, rather list out what you are currently spending and go from there. Find out if you are in a surplus or deficit each month and decide what you want to do or need to do, to get your personal finances in order.
Start out by finding your net worth. This is a number you should be aware of regardless. It gives you an idea of what your assets and liabilities are. There are programs such as Mint or Personal Capital that can do it for you, or you can write it down yourself. This is everything you own. Assets are your bank accounts, your investment accounts, vehicles, furniture, jewelry etc. that you own and are not causing you to be in debt. Your liabilities are your house that’s not paid off, vehicles that aren't paid off, student loans, credit cards, personal loans etc. that you pay each month and they do not create income for you. Your assets minus your liabilities will calculate your net worth. Once you have that number, we can calculate your monthly income. An easy way to do this is to get your two most recent pay statements and take the average number for both. The goal of this is to find your net monthly income. You will add all your earnings minus all the deductions such as taxes to find your net monthly income. Do this as many times as necessary depending on how many forms of income you may have. Next, make a section for how much you put into savings each month. You will need this later. Then comes the hard part. You need to find your monthly living expenses. And be honest with yourself, otherwise this all will be pointless. These are things like household items, food, utilities, child care, automobiles, clothing, insurance, healthcare, education, leisure items, gifts, personal care and miscellaneous. For some items this will be easy, others not so much. Here is an example of how to calculate the cost of dining out each month for dinner. Ask yourself how many times you eat out each week. We'll say two. Then in this example we'll say its you and your wife/husband. So two people total. Let's say that dinner on average costs $50 a dinner, so in this case, $100 a week; $400 a month on dining out each month. See how just in this one example, how fast things add up? So be honest and go through those simple steps, don’t just guess, "Oh, about $200 a month for groceries. Do the math and look at receipts if necessary. If you are trying to calculate once a year costs, say insurance that you pay in bulk, just divide by 12. Or tires for your car that you buy every two or three years, divide by 24 or 36. There are a lot of things you can put in this, so take your time and make it right. This will be your total living expenses. The next step are your debts. Add up all your monthly payments to your loans etc, that you have each month and get a final number.
Now you will find out if you have a surplus or a deficit and you can find your debt to income ratio as well.
Net income
5000
Savings and Investments -
1000
Living expenses -
3000
Amount left to pay debts =
1000
Total debt payments -
500
Surplus or Deficit =
500
Debt to income ratio DTI (total monthly debt payments / net income x 100)
10%
In this quick example, we have a $500 surplus and a DTI of 10%.
Your goal for the week is to develop at least one goal. Whether that be get out of debt, or increase savings, whatever it may be, find a specific, measureable, action-oriented, realistic time sensitive goal and try to put it into action. We will discuss at the end of the week to see how it went!! Remember, personal finance can be hard, but it's important to understand. Try and take this seriously and help yourself become more financially literate.
REFLECTION: A budget is a hard thing to keep accurate. Your credit cards are always being charged, your monthly charges are different because of once a year spending, emergencies, and other items that just pop up during our adventure we call life. So creating a monthly budget can be difficult and frustrating. This week when looking over my budget and trying to keep track of my spending habits and saving promises, I dug deep into what each cost went towards and what was unnecessary that I plan to avoid. The problem for me was those pesky once in 5 year expenses that are almost impossible to plan for. So how do you plan for them? Well one way would be to divide by 5 and then continue to divide by 12 to get your monthly cost. Well realistically if that’s what you do, you're more than likely going to end up a expense of less than 5 dollars. So are you really going to plan for an additional 5 dollar expense and save it for a rainy day? Probably not. I mean I'm just being honest. So I generally kept those type of preparations in the general emergency fund. Additionally, food can be a daunting task for the month. You have dining out costs, party costs, grocery costs, and maybe some snack costs in there. It can add up quick and if you're anything like me, you spend way too much on food on a daily basis than you should. The easiest way to accomplish this portion of your budget is to break it down as best you can. Start with your credit card statements for the last two months and break it down by dining out and dining in. All snacks will go towards dining in, and partying will go towards dining out. Check your statements and average the costs over the last two months. Furthermore, another way to get an accurate calculation is to break it down by week. Ask yourself how many times do you go out each week. I explained this is the post above, but it really can be beneficial for you to grasp this way to understand your spending rather than just guessing.
At the beginning of the week, I used just a plain white piece of paper to calculate my costs. At the end, I used an advanced excel spreadsheet which did most of the math for me. Which made it much easier, trust me. I sincerely hope this week was challenging for you, but effective and you were able to really learn about your spending habits in the process. I encourage you to follow these steps to help you become financially independent!