According to a study by LendingClub, 54% of Americans live paycheck-to-paycheck. 21% of that population struggles to pay bills. This isn’t confined to a specific income bracket either. 40% of Americans that make over $100,000 per year live paycheck-to-paycheck.
Many factors go into the reasons why Americans aren’t able to save some money each month, or keep up with bills. One aspect that can be within your control is creating a budget to help keep your expenses within your means.
Gather Your Information
The first step in creating your budget is to gather all the information you can on your household income, and expenses. The easiest way to organize your income and expenses is as a monthly budget. Many expenses are recurring each month, including rent/mortgage, utilities, etc.
You do not need to have any kind of special software to start. The most basic thing you can do is use a sheet of notebook paper, and write income one side, and expenses on the other half, with a line down the middle of the sheet to keep them separated. If you prefer using a computer, Microsoft Excel is always a good option, or you can use Google Sheets for free.
If you are committed to keeping detailed records and full analysis of your budget, a program such as Quicken is a good option. The most basic subscription is $35.99/yr.
For income, include all net proceeds you receive in a given month – any paychecks, tips, cash from side jobs that you can count on as regular income, etc. It is important to consider the net amount, and not gross – you can’t spend money on groceries that’s already been taken out of your paycheck for taxes and social security.
For expenses, include everything you can – rent/mortgage, utilities, loan payments (car, student, personal, etc.), groceries, car maintenance (including weekly gas consumption, and allowance for regular maintenance), household goods, discretionary spending (i.e. eating out, streaming services, etc.). If you use a credit or debit card for most or all of your transactions, using your last 3 statements should help give you a good average how much you spend, and where, on a regular basis.
Categorize Your Income and Expenses
Both income and expenses can have categories of “fixed,” or “variable.” Fixed income can be what you generally take home with each paycheck, assuming you have a base salary, or a consistent number of hours worked each week. Variable income would be things like tips, 1099 income that can vary from month-to-month, or each season.
For expenses, the fixed ones are those that have a consistent billed amount each month. This includes your rent or mortgage, loan payments, credit card bills, and utilities. Also, any other subscriptions, such as streaming services, Internet service, and cell phone plans would fall in this category because the amount billed is the same every month. Variable expenses are groceries, gas, car maintenance, and other discretionary spending.
Once you have those categories organized, the next way you can look at each section is based on what is, “must have,” versus, “nice to have.” Rate each item on the list based on how essential it is to live your life. Paying your rent should rate much higher than being able to have a date night at Applebee’s every Friday.
Get Your Totals
By now, you have all of your income sources and expenses listed out, and you have grand totals. If this is your first budget, the likelihood is that your expenses are either close to your total income, if not exceed your income. No worries – you are doing this exercise to help fix that.
What Are Your Goals?
Now that you see the picture of where your financial wellbeing is, where do you want to go from here? Setting a budget, and sticking to it are vastly aided by motivation. Do you want to take a vacation? Do you want to get out of debt by a certain date? Do you want to save up for a new car, or a down payment on a house? Find your motivation, and use it to determine what you need to do in order to meet it.
No matter your goals, be sure they are attainable. You may have to adjust your timeline, or some factor of it based on how much money you need to achieve your goal, and how much your monthly budget will allow you to put toward it.
How to Adjust
Budgeting is all about focusing on what is within your control. Generally, you can’t drastically change your income overnight to accommodate your expenses. You may be able to figure out some ways to boost your income, but plan according to what you actually have, and not what you want to have. If your income changes, you can always adjust your budget.
What is within your control is your expenses. You can choose where you live, what kind of car you drive, and how much you spend on entertainment. Generally speaking, you can make a lot more adjustments to your expenses that can make an immediate impact on your budget than you can on income.
Reducing Certain Expenses
The first things to look for in adjusting your expenses are the areas in which you can reduce the cost, and it not adversely affect your lifestyle. These are simple adjustments you can make where you are lowering the cost of something you use, and still get the benefit of it. Some examples:
- Lower your car insurance – shop around for car insurance rates to make sure your premium isn’t too high. Often, carriers gradually increase your rates with each renewal so you end up spending more on insurance with your existing carrier than if you switched.
- Find an electricity provider with better rates – many states have deregulated power companies. If you reside in one, shop electricity rates between the available suppliers and see if you can lock-in a lower rate.
- Reduce your Internet service package – do you have a super-high speed internet connection, but would do just as well with the next step down? You could probably save $30-50/mo. by reducing the speed on your internet service if you took a step down on the package, and still work well for what you need it for.
- Reduce the amount of times you eat out, or buy coffee at a coffee shop. I get it, eating out is fun and relaxing. Getting your Starbucks fix can feel like a necessity in life. To help your budget, cut these activities in half of what you are currently doing. You can still enjoy the occasional meal out, and also get the triple-shot espresso latte on occasion, but you can also have alternatives at home that cost less.
- Bump your thermostat by a degree or two. Depending on the season, bump your thermostat up a degree or two warmer in the summer, or lower in the winter to make it so that your HVAC system doesn’t have to run as much. You may already keep your temperatures modest, but for those that keep their systems running as much as possible, this one’s for you.
- While on the topic of home energy use, If you own a home, many state utility companies offer free home energy audits. You may get free energy efficient light bulbs from it, plus available rebates and savings on other things that could help make your home more energy efficient, such as insulation, windows, and appliances. Definitely take advantage of the free audit, if it’s available to you. Anything else you’re able to get from it afterward is a happy bonus. At a minimum, you’ll have some ideas on how you can lower your bills.
- Consider where you are purchasing certain household goods, and if you’re getting the best price for it. Paper goods, and cleaners tend to be more expensive at grocery stores than at other retailers like Target or Walmart. If you’re an Amazon junkie, you may be paying a hefty premium for some things for the convenience of having it delivered to your doorstep. If you have the time and ability to pick things up for yourself, you can still get the same things you want, but just make sure you’re not paying more for it than you otherwise would need to.
Cutting Your Expenses
After you’ve gone through all of the things that you can trim, it’s time to decide what things can go altogether. Depending on your goals, and how much you need to cut from your budget to meet it, this can start to feel a little painful. This is why you need to keep thinking of your ultimate goal, and doing these things will help you get there. Some examples:
- Cable or streaming services – Nobody needs television. It can feel like it sometimes because of the need to be entertained by a favorite show. By all means, keep your Internet connection – it opens you up to a lot more possibilities, and you can likely still find a lot of ways to be entertained in the same ways you would with your cable subscription. If you’ve already cut the cord, take a look at which streaming services you’re paying for (you know it’s more than one), and cut out the one(s) that you watch the least.
- Gym membership – how often do you go? Like, really? Could you find alternatives to exercise outside the gym? Does your employer or health insurance provide any kind of reimbursement so that you no longer have to pay it?
- Services that you’re paying for that you could do yourself. For example, if you pay for someone else to come mow your lawn, have a maid that comes on some kind of schedule, or anything like that. Take the time to do it yourself. You’d likely do a better job, anyway.
- Get a balance transfer on your credit card(s) – if your credit is decent, and you have a credit card balance, see if you can get a balance transfer to a card that offers 0% APR for a certain amount of time. This won’t necessarily reduce your monthly bill, but it will reduce your overall debt to your credit card accounts because you won’t have to make payments toward an account with a double-digit interest rate. Not having to pay interest will help you be able to pay down/off your credit cards faster.
- Similarly to the point above, if you have a number of different loans or credit cards that have a balance, another option is to get a debt consolidation loan. This can help reduce your monthly payment by combining debt sources that have higher interest rates into a single loan that has a lower rate, and will have fixed monthly payments. The key to this option is to not rack up more debt on the accounts you just cleared up.
- Downgrade your house or apartment – your housing is your biggest fixed expense. If you’ve trimmed and slashed a lot of other things leading up to this point, and you’re still not able to meet your goals, it’s probably a good idea to consider selling your home and downsizing, or finding another option when your lease agreement is up. This is a far more drastic measure than any other on this list, but is a consideration because of how much money that it can save you by finding a different rental, or if life circumstances changed in a way where you can move to another area with lower home/cost of living rates.
Putting it into Action
Now that you’ve decided on what adjustments you are going to make, and what your new monthly budget will allow you to put toward your goals, it’s time to put it into motion.
One of the best things you can do at this point is to find some kind of system to organize your money, and make sure your budget is followed as you have planned.
One popular option is to automate your savings by having your direct deposit split each week, so that the amount you need to put toward your goal is automatically deposited in a separate account. It isn’t in your daily expenditure account, so you can’t spend it by accident.
If you utilize a budgeting program like Quicken, it can help you keep track of your expenses, and how much you’ve spent in each category throughout the month. You know what your budget allows, and keeping track on a regular basis will help you know how you are pacing to hit your budget, or if you need to make some additional adjustments along the way.
Another more “old school” option is the envelope option. If you want to operate on a cash budget, keep separate envelopes for each category of expenses – rent, groceries, bills, incidentals and your goal. Each time you get paid, split the proceeds accordingly to each envelope, and use it as intended.
Your goals can be attainable by exercising financial discretion, and making sure you pay attention to where your money is going. The act of preparing a budget for the first time can be very eye opening, as you may not fully realize the full scale of how much you spend on certain things throughout the month.
Budgets are meant to be fluid. Your income could change, and as you make changes to certain expenses, it can also allow for others. If you find yourself yearning for some Bourbon Street Steak, increase what you’re allowing yourself to do for eating out, but find something else you can cut to offset it. Be the master of your budget, and meet your financial goals.