People that are in a constant state of financial distress should take some time to set a budget for themselves. This is a way for people to monitor what they are spending their money on and how to allocate their money appropriately. This is one of the fastest ways for people to realize what they have to do with their money before they are distracted by what they want to do with their earnings.
One of the first things that people do when they hear the word budget is cringe. Most assume that if they put themselves on a budget, they are doing something wrong and have to be punished. There are some that think they will not be able to have fun with their money anymore. Neither of these assumptions is true. When a person goes on a budget, it’s not a punishment and there is plenty of room in a properly prepared budget for fun.
Step 1: Collect all receipts and check stubs or sources of income for a month. Most people are not honest with themselves when it comes to how they spend their money. They are not honest about where they spend their money and why they spend it. It’s a natural occurrence because nobody wants to feel like they are being irresponsible with their money. Keeping track of any money coming into the home helps make people realize exactly how much money they are making rather than allowing people to estimate and assume.
Over the course of a month, everyone that wants to set a budget should collect their receipts and income sources. Everything that money is spent on should be tracked and recorded. The receipts and notes can be put in a shoebox or a glass jar. At the end of the day, if there are any receipts, they should be put into one central location and not examined. This irrefutable proof of where money is spent. It’s also proof of spending habits and actual income.
Step 2: After the month has passed, it’s time to work out a budget. It’s time to list the things that have been paid for over the course of the month. There will times going through the receipts that people will wonder why they decided to spend money doing certain things. Place these receipts in like piles. All receipts for entertainment in one pile, bills in another, random spending in one, lunch receipts in another and continue for as many piles that are necessary.
Step 3: Take some time to examine the piles and do the math. How much has actually been spent on necessities? Before people begin saying having their $7.98 coffee fix from the coffee house is a necessity, do the math. If $7.98 is spent once a day, 5 days a week, 52 weeks a year the grand total is $2,074.80 in coffee and snacks alone. Is that really necessary or an indulgence? If a person has to have coffee, there is nothing wrong with bringing coffee from home. Eating is a necessity but spending $8 a day, 5 days a week, 52 weeks out of the year is not a necessity. Eating at work shouldn’t cost $2,080 per person in the home. A person can save that money and bring lunch from home.
Now it’s time to determine the real necessities. Housing is a necessity. Transportation, in most cases, is a necessity. Clothing is a necessity. Buying a new designer bag every week or paying for a new pair of shoes every week is not a necessity. Food is a necessity. Those things are necessary but they can be managed and money can be saved.
Step 4: Look at how much money is actually coming into the home. This is the hard part for many people. There are millions of people that assume they have a certain amount of money to spend and are shocked when they see they don’t. This is how people over spend and get into debt. They assume they have the money to spend when in actuality, they don’t. Write down the exact amount of money that is considered income and know what that limit is.
Step 5: Realistically set money aside for necessities and discretionary spending. Now it’s time to look at what has to be paid for every month. The first things that should be listed are necessities. Every adult should pay for shelter, transportation, food and associated costs (insurance, homeowner association fees, etc…) should be paid for first. After that has been done, DO THE MATH! What money is left for discretionary spending? Saving?
Only then should one start thinking about spending money on frivolous things such as that $7.98 coffee fix every day. It is during this time that people should think about paying off debts and saving. It is time for people to start prioritizing what they do with their monies at this point.
Putting oneself on a budget can be hard. It is hard especially when someone has to do it that has never had any restraints on their spending habits. Once it is done, many people begin understanding the ramifications of their spending and how it affects their daily lives and financial future.