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As much as I love memeing and adding a personal twist to my “how-to” articles. Budgeting is one subject where it’s pretty serious. Over one-third of American household are living paycheck-to-paycheck. One hiccup, one ’emergency’ and you are living in a world of hurt financially. I don’t like that one bit. I want to talk how to create a budget when you live paycheck to paycheck.
Money management is a pretty big deal when it comes to cutting debt, paying bills, and saving money for the future. Without budgeting, probably wouldn’t have the mental strength to crawl my way out of debt.
Budgeting accomplishes two things, it helps create discipline in spending and can build a foundation for your future.
Get In The Right Mindset
Now, when I say “future”, I’m not talking about IRAs or 401Ks or other terminology that confuses the hell out of people when they first hear it. I’m talking about setting yourself up for long-term success the right way.
Creating an article about budgeting without addressing the elephant in the room does no one any favors. So I’ll say it right now, chances are you are terrible with money, period.
The truth is it’s a lot easier to take care of ‘present day’ you vs ‘future’ you. Because of that, motivation & discipline don’t exist. It’s a lot easier to justify “I’ll treat myself” now because you are living paycheck to paycheck compared to “I’ll sacrifice now to set myself up later”.
I get it, I was poor and broke and it wasn’t fun. I’m not talking about “I can’t go out tonight” poor, I’m talking about “hey I’m gonna be homeless even though I live in the worst part of town and it’s not enough to keep me off the streets time to beg for my livelihood” poor.
While I can’t speak for everyone in that situation, I can only hope to inspire and guide you in to make the decision to start budgeting, even if you don’t make much and are living paycheck to paycheck.
My point being, focusing on the instant happiness of ‘now’ to mask the reality of a ‘not-so-good’ financial situation will only prevent you from improving your financial standing.
How To Create Your First Budget
While I do recommend you get a credit card (or debit) and bank account so you can use Mint to do budgeting, I realize that not everyone has the luxury of doing that (nor the time). So this article will focus strictly on actionable steps in creating your first budget.
In my opinion, with the generally low level of financial knowledge in the US, it tends to correlate with many people and up living paycheck to paycheck. By that I mean, it’s fairly likely that any level of money management improvement could be the difference in living paycheck to paycheck vs. building for the future.
Regardless Of your financial standing – you should create a budget. Let’s get started.
Step 1: Track Your Spending
“Oh, I know how much I spend each money” you might be saying to yourself. Neat! Now do yourself a favor and open up my google spreadsheet -> Click “File” -> Make a copy (Google sheets is free to use). Click here. Once you make a copy you can fill in the numbers.
You will be able to “make a copy” and edit the numbers as you see fit. But you need to do the following:
- Track Your spending, don’t worry about the “Income” – You can fill out your income if you want, but right now you want to get an estimate on what you spend.
When starting out, you will likely need to estimate how much you are spending in most categories. I pulled this spreadsheet from Google which had about a dozen more “categories” but I feel that’s unnecessary since it’s very easy to get overwhelmed. I want to focus on keeping is simple.
Some spending amount will mostly be consistent.
- Phone Bill
- Some utilities
I do recommend that you do keep track of your spending throughout your first month even after you do your estimates. Yes, it will be annoying at first. But all you need to do is open up your notetaking app on your phone and mention “Lunch -> $10” or “Coffee -> $5”.
At the end of the month, add that up.
If you use a credit card/debit card or the bank for all of your purchases, you can connect your accounts with Mint and will track your spend for the last 60 days. You simply need to categorize your purchases.
Step 2: Add Your Income Sources
While that might be obvious to some, I notice some people aren’t really truthful when they put in their income sources. Here are my tips to include under your income.
- Only put in the money that will actually end up in your bank account – Say you work 40 hours a week and get paid 2x a month. You get paid $1800, but after tax, it’s $1,500. Only account for the $1,500.
- Chances are most of your income will be from your paycheck. But if you do any side hustles that are fairly consistent, you can add that in “other“
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If you have a spouse or other loved ones or are sharing a room with someone, include that money under your income assuming it’s a shared cost/payment.
Step 3: See The Damage
After you put in your income/expenses, you’ll see the overall “Net” column on the sheet. This is your starting baseline.
You might be someone what only looked at your bank statement once a month and it seems that your checking account might have gone up $100, or down $200, or stay even. Now you’ll be able to see on average how much you should be saving or been spending.
For me, that was a major wakeup call when I did the initial spend tracking. The point of getting to this stage is to help you realize that change needs to happen.
You might notice that you rake in an extra $150/month but if you adjust expenses and can take home more. Or you might notice you are spending $300 more than what you make, then it’s time to take action.
Step 4: Create Your Budget & Cut Expenses
The first 3 steps were actually the hardest parts of creating your budget. Now that you have your income/expenses laid out, you can make a budget that works for you (kind of).
Now take a look at your expenses, at this point you can decide how much you want to cut and see if it’s feasible.
Based on the budget example (via the first image) you see that even though there is a $500 extra at the end of the month, costs can be cut.
As mentioned before, some of these expenses are fixed.
- Rent (fixed)
- Insurance & HOA (fixed)
But outside of that, a lot of these expenses could technically be cut.
- Phone – Can you switch phone companies? What’s the cheaper rate? Are there any promos? Maybe a family plan saves money vs 3 separate ones?
- Cable / Internet – Do you want to try cutting cable? How about calling your cable company and negotiating a lower cost?
- Insurance – Have you tried shopping around every 6 months to see if your rates can be lowered?
- Entertainment – Are you using Hulu as much as you should? Do you need to spend money on games you’ll play for a few hours?
- Electricity – Be aware of how you use your day to day electricity.
- Food – Probably the biggest culprit. Do you find yourself going to lunch every day instead of packing your own? Can you cut down on going out from 3x a week to 1x a week? What would be the difference in spending?
All of these are questions or decisions that will have tradeoffs. Until you create a budget, you won’t be able to decide your action steps. Again, I strongly suggest getting Mint as a way to keep your tracking in real time.
Step 5: Make It Realistic
You might notice that you are spending $800/month on food without realizing it. The last thing you should do is make a dramatic change and say “I’ll cut it to $80”. Not only is that pretty tough to do, but you’ll have to dramatically change habits right away.
I’m generally not a fan of dramatic change by choice as you are more likely to resent yourself for it. Not to mention, you’ll build unnecessary stress on yourself.
I recommend cutting expenses by 10-15% each month until you start getting to the point where it isn’t feasible.
- In Month 1: instead of changing your food budget from $800 to $80-> Try going from $800 to $700.
- On Month 2: $700 to $625.
- On Month 3: $625 to $550.
- For Month 4: You notice that adjusting working out and make a jump from $550 to $400
- Month 5: You actually hit $450 instead of $400. Now adjust it to $400
- Month 6: You were able to hit $400 but are starting stress about the budget. You decide to keep it at $400 as you have saved $400/month more compared to the past.
At this point, you can adjust your budget even further or tweak it. I am not going to say “keep going down to $150/month”, but the point of the budget is to control your expenses to better manage money. You are your own individual with your own goals.
If you are someone living paycheck to paycheck, basic money management should help dramatically. If you are someone that simply don’t make enough, while budgeting can help, your focus should be on making more money.
Now I won’t leave you high and dry. I’ll link to related articles that can help you make more money. I do plan to do a “career” series where you can focus on learning skills.
ADJUST & CALIBRATE YOUR BUDGET BASED ON ACTUAL SPEND.
While you have set up your budget, that doesn’t mean you’ll stick to it, nor means you were right with your estimate. You do need to track your spending after you create a budget because your initial budget amounts were only estimates.
I really suggest Mint because it tracks your spending for you. You can look at how often you eat out, where you are spending the most money, etc.
After your first month of tracking actual spend with your budget, you can re-adjust your budgets at the beginning of the following month.
It’s pretty likely that after you set a budget and cut expenses, you aren’t actually living paycheck to paycheck. The extra money you are saving could be put towards other debts, saving for a house, a vacation, etc.
Your Budget Is The Key To Financial Freedom
You don’t have to listen to me and ignore a budget. Hell, you can create a budget and not think about it. But if you have ever thought about your finances are worried about money, you probably can’t help but focus on your budget once you create one.
It’s weird because I never bother paying attention to cash flow once I was making more than I spent. But as soon as I budgeted, I had a hyperfocus on paying my student loans, side-hustling for more money and have been keeping track ever since.
I think you will be surprised at how your spending habits will change once you set up a budget.
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