Today, let’s talk about creating a personal budget that works. The truth is that, your own budget is going to be one of the best things you can do for you and your money. I’m not going to lie to you, though. There are some things about a budget that are not fun to do at first, but they have to be done.
So grab a notebook, electronic or paper, and let’s get started.
Step 1: Figure Out Your Lowest Possible Income (LPI)
One of the basics in any budget—you have to know what sort of income you have. For those who are on a salary, this will be a little simpler. For those of you that are hourly, or at a job such as a restaurant server, it’ll take a little more math to figure out.
I like to call this your Lowest Possible Income (LPI) because we will be using this as a base. It’s always better to underestimate your income so you have a greater likelihood of meeting all of your bills. Then, if you have more, you can put it where you see fit.
Step 2: Figure Out Your Expenses and How They Relate to Your Income
Ah ha! The second staple of any budget—it’s time to figure out your expenses!
Gather all of your bills that you have to pay every month. This will literally be every bill you are committed to paying every month. Some examples would be your phone bill, Netflix, rent or mortgage, electric bill, etc.
Then, create a list of everything that you spend money on apart from your bills. This includes eating out, clothing, groceries, gas, etc. Anything that you can think of that you may want to budget for.
Organization Step One
Once you have all of that together, we’re going to organize these into a couple of different categories to make it easier to add up.
The first category will be every bill you have that stays the same month to month. Some examples would be your mortgage or rent, car payments or insurance premiums, credit card payments (minimums only), your cable bill, or your cell phone bill. If you pay the exact same amount each month, put it in this category along with the amount you pay monthly next to each bill.
The second category is all of your variable expenses. So these are things that may not be the same month to month, such as your groceries, auto fuel, clothing or personal expenses. If it was a different amount than it was the past month (and they didn’t just raise your rate on something), put it in this category.
Similar to if you have a variable income, figure out an average of how much you spent in these categories over the past 6 or so months. It doesn’t have to be a year or two like when figuring out your income. The idea is to just give yourself an idea of average by including high spend months such as holiday time, and low spend months like at the beginning of the school year.
Once you have an average, I recommend you overestimate a little bit to make sure that you are covering your expenses. Put that overestimated average down next to the name of the bill like you did for your fixed expenses.
Organization Step Two
After that step, you should have a monthly amount next to each of your bills. We no longer need them categorized into fixed expenses and variable expenses. Instead, in order to lay the groundwork for any changes that need to be made later, we’re going to organize your expenses into “Needs” and “Wants.”
Categorizing these should be pretty simple, but there may be things that you consider a need that someone else would consider a want. That’s definitely okay since your budget is supposed to reflect who you are. Things like your housing and food costs that are necessary for you to live you’ll probably want to put in the “Needs” category. Things like going out to eat, or to a movie, or other categories you could cut out easily you’ll want to put as a want.
Go through your expenses and determine what your wants are and what your needs are.
The Math Part
Once you have all of the things you spend money on organized in “Needs” and “Wants,” you’re going to add up totals. In order to make it easier—and the entire reason we put them in separate categories—you’re going to have three separate totals. One total will be for your needs, one for your wants, and one for both of those put together.
After you’re done figuring out everything that you spend money on right now, it’s time to figure out how the money you spend relates to your income. This one is quite simple.
Take your added up income and subtract the total expenses. How much is leftover? Is it more than your income? Less than? Significantly less than? Significantly more than?
This will help you figure out if you are already spending more than you earn. But don’t make any adjustments quite yet. We’ve got some work to do first.
Step 3: Figure Out What You Value
Here comes the fun part! This will take some effort but I promise it’ll be worth it and rewarding—and possibly bring back some fond memories!
Let’s figure out what you value!
Your values are the thoughts and beliefs that define how you live your life, spend your time, and spend your money.
Do you have vacations you like to go on? Is spending time with your family and friends important to you? Maybe it’s being able to go out to an expensive meal with your significant other once every month or two.
Figure out what’s important to you! Find out what you value. I will not tell you to never spend money on your 2000 naira Chicken republic chicken wings if that brings you real joy and value. Part of creating a budget that you’ll stick with is using it to fulfill your life by doing the things you enjoy.
A great way to save money is by not doing what you don’t enjoy.
Let’s look at some practical ways that you can use to help you figure out what you value.
Ask Three Questions
The first step to figuring out what you value is to ask yourself three questions. You may want a piece of paper for these. The questions are:
- What is most important in my life? – Is your faith at the top of your list? Maybe your family is at the top. It could be that you have a couple tied for the top spot. Think really hard about this one.
- What do I enjoy spending my money on? – Write down things that make you happy to spend money on them. For instance, I enjoy spending money on really good meals like a jollof rice and chicken dinner, usually within the company of others. And I’m not talking about a small rush of happiness that fizzles out. This happiness lasts, partly because of the food, and partly because of the company. Is there anything you enjoy spend money on that has a lasting effect?
- What do I enjoy spending my time on? – What do you really enjoy doing with your time? Do you enjoy working out at a world class gym? How about sitting in bed at night getting lost in a book? I enjoy spending time watching old movies so I allow myself the luxury of spending money on them.
Time and money are two completely different beasts so it’s important to answer both questions.
Step 4: Cut Expenses that Don’t Match Your Values
For this one, you’ll want your list of expenses side by side with your values. The next step is to cut the things out of your budget that don’t align with the core values that you just came up with in step three. Get the chainsaw ready!
The idea of this is to lift some of the burden off your budget by cutting some stuff out. If you’ve been purchasing things trying to keep up with the Joneses, just to feel good, or because it feels like that’s what you’re “supposed to do,” cutting out the expenses that don’t align with your values will do you a world of good. When you realize you don’t have to spend money on the things that don’t matter to you, you’ll feel as if a little weight has been taken off of your shoulders.
Go through your expenses one by one and see if they line up with your values. See if they line up with who you are.
“Wants” First
Start with your wants because those are the easiest to cut back on. Your needs will be a little bit more difficult. Start by analyzing those wants according to your values and scale of preference, that way you can know the ones to cut off.
Adjusting Your “Needs”
Now that you’ve gone through your wants, it’s time to adjust your needs to match your values. You might be saying, “Uh? Needs are needs. You can’t really do much with those.” Ahem…yes we can.
I admit. Adjusting your needs is going to be difficult. For some of you, it may be extremely difficult, but it can be done.
Add Them All Up
Now that you’ve adjusted your wants and needs to better align with your values, it’s time to add up your expenses once again. Do the same thing as before with having two separate totals for needs and wants and then a third total adding your needs and wants together.
Now remember, this whole step focused on cutting out the expenses that don’t align with your values. Your new totals should be lower than what you had before. Add your totals up and write them down.
Congratulations!
You’ve successfully completed your very own budget!
This budget will work for you because it is based on who you are and what you value. Gone are the days where you have to feel bad about spending money. You are spending money on things that matter to you and no longer spending on things that don’t. Your budget should give you a feeling of freedom either in knowing that you won’t have regrets spending money on what you value, or knowing that your budget is helping you get to that point (or both!).
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