Get Rich Slowly- Step 2 Make a Budget and stick to it.
In step 1 of my Get Rich Slowly hubs you made a financial plan of where you are now and where you want to go. Hopefully that means you have a clear idea of what you own and what you owe, and will also have perhaps set yourself a goal for the future, however small.
What we now need to look at is the nitty gritty of where your money goes each month. Many people spend their money each month without ever really having any sense of exactly what exactly they are getting for it..
It doesn't really matter how you do this. There are computer software packages out there like Microsoft Money that can make it easier, but you can just as easily create your own spreadsheet or even just a paper record of where your money goes each month.
The first thing to do is to collect every bill that you have to pay regularly. This includes even the bills that may only be annual expenses such as insurances and pest control. Often the easiest way to do this is to go back through old check books and bank records looking at what you paid over the last year.
Having a record of these larger expenses I would then recommend buying a small notebook and keeping a record of what you spend over a two week period. This should be down to the finest details i.e those coffees, chocolate bars, magazines-everything. This might seem pointless but small frivolous expenses often add up to a surprisingly large amount when totalled.
Having got all these figures together it is time to look at your budget as it is today, to look at what you have been spending.
Firstly place your income at the top, including all sources such as benefits that you receive, your regular pay etc.
Secondly have a look at your bills. If they are bills that you need to pay monthly immediately write those into your budget as an expense. Some bills need to only be paid quarterly or annually, and how you deal with these ones will depend on your current financial position. If possible break them down into a monthly figure and write that figure into your budget. This helps you to plan for larger bills and will force you to save for them throughout the year.
If your bills are paid annually but due in say 6 months and you will not have sufficient funds to pay them unless you save more now, calculate how much you need to budget for each month to get them paid on the right date. Once they are paid that time you can then adjust your budget to allow yourself to save for them over the full year.
Next you need to add in all your expenses like food, school expenses, transport such as bus fares- the weekly expenses that you spend regularly. Put these into your budget. Allow for all the expenses such as coffees that you have been recording over the last two weeks in your notebook.
Finally, think about things such as Xmas gifts, birthday gifts, and other expenses that you might want need ot cover throughout the year, such as car maintenance medical bills etc. Your budget needs to allow for a contingency.
Having done all of this add up your expenses and deduct them from your income figure. Don't be surprised if you end up with a negative figure. Many people who have been using credit cards and slowly building up debt are astonished to realise how far off budget they have been. It isn't time to panic, the reason you are doing this is so that you can sort it out.
If however your expenses are less than your income you have obviously been saving- congratulations! A later hub will help you to make sure you are doing the best with your money.
Do you spend more or less than you earn each month?See results without voting
For those of you that find they have a negative figure when looking at your budget, this is the time to take action. As a first step divide your expenses into discretionary and non discretionary expenses. In other words the ones that you have to spend, and the ones that you don't.
Look firstly at the discretionary spending such as coffee and magazines, meals out, taxi fares, etc. Look at how much these add up to each month and whether you are willing and able to cut back on some of them. Even though technically they are classed as discretionary there may be some that you are not willing to reduce, whereas others you might feel you could give up in order to reach your financial goals.
Having looked at the discretionary items in your budget add up the savings that you feel that you can make and see whether this then helps your budget to balance. If your expenses are now less than your income and the difference is enough to help you start saving to achieve your financial goals then congratulations!
If however there is still a shortfall start to examine the non discretionary items. Even though these may technically be non discretionary such as electricity, food etc work through them and see whether there are savings to be made. Could you, for instance, use the dryer less even though it may be less convenient and therefore save money on your electricity bills? Could you cook cheaper and simpler meals, or switch to some home brands if necessary? Should you remortgage to get a better deal? All of these things can make small savings that can add up.
Having done this check your budget again. If you are now balanced, congratulations! If not, then you probably need to think about an additional source of income such as an extra part time job, or even things such as ebaying to keep your family finances afloat.
The aim of this exercise is partly to give yourself a wake up call, and partly to stop yourself from going backwards each month when you could be moving forwards towards achieving your financial goals.
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