There are lots of different factors that play into your emotional wellness, and one of them is your stress level. Your financial wellness (maintaining a quality lifestyle within your financial means) can have a significant effect on your stress level. In other words, having an understanding of your financial situation and taking care of your finances keeps your stress level down and helps you be emotionally well.
In order to understand your financial situation, you have to have a good grasp of how much money you have coming in and also where it’s going. The key to that is maintaining a balanced budget for all of your expenses in a way that not only keeps you from living beyond your means, but also allows you to save money and plan for unexpected expenses.
How to create a budget
The most important step in making a monthly budget is knowing where your money goes now. Many people spend a few dollars here and there without paying much attention to it, but what they don’t realize is how much those little expenses add up. In order to get a firm grasp on how you are spending your money, you need to spend a month tracking every single expense – even if you just spend 50 cents to buy a diet coke out of a vending machine.
One easy way to track your expenses is by carrying a small notebook with you wherever you go. It sounds silly, I know, but it works. Carry your notebook (a notebook app on your phone works too), and every time you spend any money, whether with cash or credit or debit, make a note of it. Keep all your receipts too, just in case you forget to write something down.
You can find a an expense worksheet at www.financialliteracymonth.com if you prefer to fill out a form. Just make sure when you spend money on something that isn’t listed on the form, you add that in too!
Track your spending for a whole month, and then review your notes. In general, where does your money go? Did you make wise spending choices? Were your purchases necessary? Look at some of the categories for purchases that are not necessities, but where you seem to spend a lot, such as getting drinks with friends or lunch out with your office mates. Add up your total amount spent for the month on those expenses. Does it surprise you?
Make a list of fixed costs
Now that you know how much you spend each month on both needs and wants, you can use that information to create a monthly budget. The first step is to make a list of your monthly fixed costs. This includes things like your mortgage/rent, utilities, and insurance. Your utilities might vary a bit each month, but if you have a record of your bills over the last year, just find the average for things like electricity, gas, water, and anything else that isn’t a set amount.
Other debt repayments also go in this category. That might include student loans, credit card debts, and car payments. Add up the total cost of your monthly bills that you must pay each month. We’ll use this number later.
Create a spending plan
You’re now ready to create a plan for how you will spend all your income. First, identify all your income from different sources. Even if you have just one paycheck, you might be earning interest on account, receiving dividends, getting inheritance checks, or maybe even working odd jobs. This income worksheet can help you identify all your income sources. It also helps you understand all the deductions that are taken out of your paycheck. Look closely at those too, and see if there are some areas where you might be able to decrease deductions to increase the amount you take home.
Do you allow the government to take out too much for taxes so that you get a big refund in April? If so, that is just like giving the government an interest-free loan from money you could use now. Or maybe you have a paycheck deduction for health insurance, but you can get it cheaper through your spouse? Examine your paycheck stub closely, and make sure you know where all your money is going.
Once you are clear how much income you bring in each month, subtract the total amount of your fixed/necessary costs that you calculated in the previous step. Now, how much is left over? That is your discretionary income – the total amount that you get to decide how you want to spend.
Compare your total discretionary income with the amount you tallied in your expenses journal in step one. Is your discretionary income lower than the amount you are spending? If so, you are living beyond your means and could well be destined for some very difficult financial times. If your expenses are lower than your discretionary income, you are doing well! But you also need to consider saving money.
If you have calculated that you are living beyond your means, or if you’d like to create more breathing room in your budget, the next step is to start cutting expenses. You can do this by reviewing your expenses journal and honestly assessing which expenditures are needs and which ones are wants.
Look at all your “wants” and try to identify areas where you can cut costs. Some, such as eating out or going to the movies, will be obvious. But it’s also important to look at things that you might deem to be necessities, but actually aren’t. Those include cable television, internet access, snack foods you pick up with your groceries, and even your gym membership.
If you look at your list and too many things feel like necessities to you, use this financial priorities worksheet to help you better understand which things you need versus which things you want. The worksheet will also help you rank your priorities so you can figure out what matters most to you. Don’t forget to make saving a priority too. It’s important that you don’t set up your monthly budget so it consumes all of your total monthly income. Saving for vacations and retirement and unexpected expenses is key component of your financial wellness.
Set up your budget sheet so that you account for all your disposable income (your total take-home pay), and you include your monthly set expenses, your “wants”, and savings. You can find lots of budget templates online. This one is pretty simple and straightforward to get you started.
A few more details
One thing to keep in mind when you are cutting expenses is to be realistic. Look back at your spending journal and see what makes sense. If you are feeding a family of four, budgeting $50 per month for groceries won’t work, and you’ll just end up getting frustrated.
Also consider whether increasing your income is a possibility. Besides looking at your paycheck deductions, would it make sense to find additional work? Is it time you talked with your supervisor about a raise? Are there other ways you can turn your spare time into extra cash? Even if it’s just for a short while, finding a way to increase your income can help you achieve your financial goals sooner.
One last note about creating a budget. If you’re not sure how much you should be allowing for different categories of expenses, follow the 50/30/20 rule. Spend 50% of your net income on all your necessities. That includes your monthly fixed expenses, plus other necessities like food, child care, gas and oil for your car, etc. Spend 30% on all your wants. This is anything that is not a necessity and includes internet, cable, entertainment, updates to your home, etc. And plan on spending 20% of your income on savings and debt repayment.
You can divide your savings plan down even further, into short-term (small purchase in a few months), medium-term (vacation next year), and long-term (emergencies, retirement, and major purchases).
The debt repayment part of your overall 20% is anything you spend over the minimum monthly payment. This would include extra payments on your student loan or car loan or any other such debt. You might want to use this financial goal worksheet to help you identify your savings goals. It also will help you determine whether they are short or long term and how much you need to save to meet those goals.
How to use your budget
Once you create your budget, follow it! But don’t be too rigid. You don’t want your money to control you, and you don’t want to feel deprived. Keep tracking your expenses, so you can be sure you are following your plan. After a month or two, re-evaluate it and see what worked for you. You might have some areas where you need to allow for more spending, and there might be other areas where you could tighten your spending even further.
Remember to keep your financial goals in mind. Do you want to be debt-free? Would you love to retire early? Are you saving up for an extravagant vacation to commemorate a big event? When you remember your big goals, it’s easier to stick with your spending plans.
Did you know April is financial literacy month? It’s the perfect time to begin understanding where your money is going and start designing a spending plan that will work for you. Why not get started now?