You’ve heard it a thousand times. You’ve probably said it a thousand times. “I have a limited budget,” you say cheekily, before you order the $ 5 PBR and shoot a combo on your dive. And while all of that is good and beautiful, the less sexy truth is that it is a bit more complex to have a limited budget than just ordering the cheapest liquor at the bar. But trust us, if you are seriously considering budgeting now, you will be very, very grateful for the future.
Simple steps to create a budget
If you break it down, a budget is actually a fairly simple equation. They look at what comes in and what comes out and want to make sure that what comes out is less than what comes in. To do this, however, you must have financial management.
Understanding your financial habits is key to knowing why a certain amount comes out each month, and ultimately helps you reduce that amount so that you have more in your bank account at the end of the month. Sounds good / super creepy and likes a lot of work? Awesome, here’s how to get started:
1. Find out how much you earn per month
This is the first step, the part “What comes in?”. Collect your paychecks and calculate your net income (the amount you have left after taxes) to see how much money you take home each month. If you are a freelancer, this part is a little more difficult. Collect all of your bills from last year and add them up to see how much you’ve earned on average per month. If you don’t expect your contracts to change too much, use this monthly estimate. You must also consider all taxes that you may owe at the end of the tax year. If you get dividend income from investments, take that into account as well.
2. Find out how much you spend on essentials each month
Now comes the part “What comes out” that is decidedly less fun. Make a list of all of your monthly bills: rent, subscription services like Netflix or Spotify, water, electricity, gas, mortgage payments, car payments, your phone bill, health insurance, gym membership, etc. These are also called “fixed expenses or expenses you each.” Have to pay a month and they usually stay about the same.
3. Find out your variable expenses
These are expenses that do not necessarily have to be resolved and are not required to keep a roof over your head and the lights on. These expenses are also known as “fun” expenses: money that you spend on clothing, dinner, happy hour drinks, excursions, theater and film visits, visits to grocery stores, etc. Depending on your lifestyle, facing it can be a little painful.
4. Add up all fixed and variable expenses and compare them with the income
This is where simple math comes in. If your spending is higher than your income (or you barely hit breakeven) it’s time for the budget!
How to save money if you have a limited budget
Reduce your variable costs
The best and most obvious starting point is your variable expenditure. Some tips for reducing your “fun” costs (we know, sorry):
- Cooking at home instead of eating out. This is healthier for your wallet and your body! Cook a large amount of something delicious on the way home from work or to buy a $ 16 lettuce for lunch so that you always have a meal ready instead of having to buy it.
- Throw away the expensive caramel soy mocha whatever latte, get a nice thermos and brew your own damn coffee at home. You save so much money in the long run
- Buy your groceries in a cheaper supermarket or go to the farmers’ market, where the products are cheaper, fresher and in season. There is no time like today to give up the habit of whole foods.
- Find ways to hang out with friends where you don’t have to buy laps at the bar. Host a potluck, have friends for a movie night, go to the park, explore a new neighborhood … it will get you out of your same Friday-Sunday routine and you may find a new favorite activity that you don’t will leave with a hangover the next morning.
- Buy the sales. Do you really need this $ 50 graphic t-shirt or can you bear to wait until next month until it is available for $ 15? Or maybe you can find something better for $ 12! Sales are exciting who like.
Cut your subscriptions (or at least some of them)
Now it’s time to look at these fixed costs. The easiest way to start is with your subscriptions. Do you really need Netflix, Hulu, HBO, Showtime and whatever else there is? Could you perhaps reduce it to one and then use your ex-girlfriend’s aunt’s passwords to access the others like everyone else does? The same applies to Spotify, Tidal, Apple Music etc. Simply select one and name it a day. Then take a close look at your gym membership. When was the last time you went to the gym? Sometime in 2016? Cancel that now. Use the money you saved to buy weights that you can use at home instead. Even if you don’t use them, it is still better to send a monthly donation to Crunch.
Follow the 50/30/20 rule
Think of this as a guideline rather than a rule. About 50% of your income should be spent on non-negotiable things like rent, utilities, car payments, mortgages, etc. Basically most of your fixed costs. 30% of your income goes to your variable expenses, where you have the greatest flexibility to save and reduce costs. The remaining 20% should be used to secure your financial health: this means paying off high-interest debt, increasing your savings and investing in the future. The percentages vary depending on income, additional financial needs and debt situation, but are a good yardstick.
Find a savings plan that works for you
After saving less than necessary expenses, it’s time to think about what to do with that extra money. The first task is to find a savings account with relatively high returns on which you can park part of your money. If you haven’t had any savings yet, this is an important first step. Though your money does not generate high returns as would be the case with investments, savings are vital to help you get through difficult periods and towards a short-term goal (five years or less) like a house, vacation, or one Investment to work towards a wedding. Savings also help you create the financial foundation on which you can safely invest. Which brings us to the next point …
Once you have enough savings to cover the cost of living for two to three months, it’s time to use part of this “20%” cut in your income to invest. This way, your money works harder than a savings account, and you also benefit from the magic of compound interest, as your money accumulates interest over time. The key word here is “time”. Contrary to your savings, the money you invest should not be easily accessible. The money you invest should be used for a long-term savings strategy, e.g. B. for the retirement or college fund of your not yet born child. Look for investment accounts with low fees and low entry barriers to get started as soon as possible.
Another great option when trying to invest in a budget? Micro investments. This means that instead of large amounts, you literally – often automatically – invest small change by linking your debit and credit card to an account that rounds up purchases and invests the change. This way, you invest money that you won’t even miss and can collect up to several hundred dollars a year just by starting your day. It’s that easy.
How to stick to a budget
After you set the budget, you face the difficult part: actually stick to it. The key to sticking to a budget is the same as sticking to a diet: it will only work if it is sustainable for your lifestyle. That said, if you like going out for dinner or can’t live without Netflix, Spotify and Co., it’s unrealistic to cut these things out of your life completely and expect you to stick to them. The most important part in creating a sustainable budget is making sure that it actually works for your life. Aside from that, here are some tips on how to make the whole thing less painful all around:
Using cash for your daily expenses makes it easier to keep track of how much money you’re spending than if you just steal a piece of plastic without thinking. Take out a certain amount of money about once a week, and once that amount is gone, you’re done. You will also think much more about your purchases. If you only have $ 50 in your wallet, do you really need to buy another satin bomber jacket for $ 45?
Choose a subscription and delete the rest
As already mentioned, you get the Hulu password like everyone else from the friend of your former colleague’s second cousin.
Set up automatic deposits
By ensuring that a fixed amount is automatically deposited from your checking account into your savings and investment accounts every month, you don’t even have to think about putting the money aside. A monthly recurring deposit ensures that your savings can be built up and takes human error out of the equation.
Curtis Pope, portfolio manager at Wealthsimple, explains that sticking to your budget and automating your savings is the key to success.
For successful customers, automatic saving is probably the most powerful part of their financial strategy.
Curtis advises employees to closely monitor their cash flow to ensure that net income is higher than their spending. Then you should save additional money. A monthly recurring deposit ensures that your savings can be built up and takes human error out of the equation. This also means that you can accidentally spend your savings on Coachella tickets.
Start planning your meal
Instead of going to the grocery store and just buying everything you like and ending up with 10 tubs of Nutella and an avocado, actually write down a list before you go. Better think about what you want to cook all week long so that you have a rough idea of the meals you will be preparing and plan accordingly. You will be much less tempted to eat out when you have all the ingredients to prepare delicious, nutritious meals right at home.
Forget that you have a credit card
A credit card is a classic budget buster. If you get lucky, it can be difficult to remember that you are still spending money. It will be all the more painful to remember when you receive the credit card statement next month and find that you have used up your budget at Señor Frogs. So don’t spend money that you don’t have and just leave the credit card at home.
Check your budget every month
See, things happen. Unexpected expenses emerge, the dress you saw recently in the store is chasing your dreams, your best friend has decided to get married, and wants to have a Bachelorette weekend in Cancun yesterday. If you review your budget every month and make adjustments to new developments, new sources of income and new expenses, your budget will remain manageable and compatible with your life. This ultimately brings you to a successful budget.
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This article was originally written for and published by Wealthsimple.com on January 14, 2019 and was re-published here with her permission.
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