Debt Free by 33: 2014 Budgeting How-To

A lot of people tend to get overwhelmed by their New Years resolutions. You want to lose weight, eat healthier, spend less, learn more, etc etc etc. That's a lot to take on on top of a full time job. By the start of February, you've realized that half of those resolutions have already been broken and you're back to your old habits. The key to following through with those resolutions is breaking them down into steps that you can actually accomplish. When you're in school, you are given a syllabus to get through a class. For example, a book that you must read during the semester might be broken down into 2-3 chapters a day. In life, the same rules apply. For the majority of us, just simply stating "I want to be healthier" isn't enough. There needs to be specific parameters that you can measure to see if you are or are not meeting your goals. Sometimes there's a lot of pre-work that you must do to set yourself up for success.

For this Budgeting How-To post, I will go over some steps to find what your monthly budget should look like. In order to spend less and save more, you have to look at what you have to work with: your monthly income and how much you spend on a monthly basis.

1) Monthly Income
This one is easy enough. Just look at your weekly or biweekly paychecks for the month of January (hence why I'm posting this in February) and add up those amounts. Take that amount and round down to the nearest $250. According to Wikipedia, the 2011 median annual household income in the United States was $50,054. Divide that by 12 months gives you $4,171 per month. So lets say average Jane made $4,171 in the month of January, you're going to round that number to $4,000. Unless you have a salaried job, your paycheck amount my vary from time to time so $250 seemed like a nice round number to work with. On your budget sheet, you will put this down as your "Monthly Income". What about the rest of the money you ask? This money goes towards something you want out of this year. Did you want to save up for a house? A vacation perhaps? Maybe you just want a pair of Jimmy Choos or a designer handbag? This hypothetical person would be saving $171/month. That's $2,052 in a year. This doesn't have to be something you're saving up for. You can use that monthly money as seed money for shopping or dining out or coffee fund lol. Just do something nice for yourself (if you haven't noticed, I'm all for spoiling yourself :)).

2) Expenses
This category is where people tend to give up. Face it, everyone has a ton of expenses. Living is expensive lol (although death may be quite costly as well, but let's not digress). To make this step a little less daunting, let's break it down into sub-categories. (I have a category for parental expenses because I, like many other children these days, support my parents in some of their monthly bills. You can remove this category if you don't and add additional categories i.e. child support, etc as needed.)
*note if you use your credit card to pay for certain bills (i.e. you have an automatic bill pay that pays your cable bill through your credit card) do not create a subcategory for those items since they will be included in your expenses under your credit card. Example: I use my credit card to pay for my cable/internet at my parents house so I will not create a subcategory for that under parental expenses since then I'd be doubling up. 

• Home/Apartment Expenses: 
• Rent
• Cable/Internet (if you have two separate bills, put these into two separate categories)
• Water
• Gas/Electric
• Parental Expenses:
• Home - Water
• Home - Gas
• Home - Electric
• Student Loans:
• Credit Cards:
• This number usually varies from month to month. This is where you'll have to do a bit of research. Go through your 2013 credit card statements. Write down those amounts and look to see if there are any severe outliers. Maybe you paid off a vacation one month and the amount skewed your payment. Maybe you did a lot of Christmas shopping and your December bill was crazy. Whatever it may be, if there is month where your spending deviates over $500 from the rest of the amounts, you've got yourself an outlier. What you then want to do is just remove that outlier from the picture. So if you've got 2 outliers, you will then add up the other 10 statement amounts and divide it by 10. This will give you your average monthly spending on your credit card. If, however, your payment amounts vary all across the board where there isn't one sore thumb sticking out, just average it out. Round this to the nearest hundredths place. (note: this only works if you're paying your credit cards off in full every month. If you're not then that's probably something that needs to be addressed first).

Last step in expenses is to add these all together. This gives you the total amount you spend a month.

3) The Difference

Take the amount you got from "Income" and subtract the total you got in "Expenses". This is where you find out how much wiggle room you have each month. If you find that you are in the positives, you're in luck! This means you can put this money towards your savings or towards repaying a loan. If you have unpaid credit card debt, this money could go towards that too. If you're in the negatives, that means you're spending above and beyond your means. This would be a good time to take a long hard look at those expenses, break down each credit card expense into categories and find out what categories you're spending the most money in and cut down those expenses. Again, it's a long tedious process but the reward will be huge. 

I hope this was helpful to those of you trying to make a budget and stick to it for the new year. I wish you all the best on your New Years Resolutions!