Part of self care is learning balance, and finances are a big part of that. For me, in order to live a life that is low in stress, I needed to learn to live comfortably within my means by developing (and sticking to!) a budget. I had experienced the first part of my life living very frugally, not allotting any of my hard-earned money for things that allowed me to take a break! Then I spent the first few years of my marriage spending money as quickly as we earned it! After experiencing the stressors that came with both extremes, I realized that I needed to learn balance. How did I learn that skill? By taking a class!
I took a 12 week Dave Ramsey course with some of my closest friends about 10 years ago. At the conclusion of that course, I was still married and we DOWNSIZED our house right as we were expecting our 4th child. It was a decision that many thought was crazy, but for us it provided the financial freedom to work less and spend time raising our children. It also allowed us to budget for “blow money” which provided the perfect blend between “spend” and “save.” Here are some of the tips that I learned in that time that I continue to use today.
Step One: Determine monthly income
Whether your get paid the same amount every 2 weeks or have varying paychecks, you can figure out what your average monthly income is. Just add up all of the money you made in the last 12 months and divide it by 12. Some months may be more or less, but you can adjust your budget accordingly.
Step Two: Create a list of recurring fixed monthly expenses
Most of us have the same recurring payments each month: mortgage or rent, car payment, student loans, Netflix, Cable, cell phone etc. In this step, don’t rely on your memory. Use your last 3 months of bank statements and write down every payment that was the same each month. This is your list of fixed monthly expenses.
Step Three: Create a list of recurring variable expenses
Again, look at your past bank statements. For this one, I look at my last 4 months because sometimes things change depending on the weather (like my utility bill). Write a list of variable expenses, such as utilities, gas, food, entertainment. You can go off of the last 3-4 months of credit card statements as well. This step may be tedious, but you need to know where your money has gone in order to create a budge and a plan that you can stick to. Figure out how much you spend each month on average.
Step Four: Figure out yearly expenses (Gifts/holidays, car insurance, back to school, vacations)
This one requires going back and looking at your entire year of spending. Write down expenses like vacations, car insurance/life insurance/health insurance premiums, Christmas/holiday spending, birthday parties and gifts, entertaining guests, etc. Tally up how much you spent and divide that by 12 to get the monthly amount that you should set aside to plan for these expenses.
Now add up the numbers from steps two through four (your monthly spending) and subtract that from step one (your monthly income). Do you have money left over? Do you need to adjust your spending? The sample budget below gives you some percentages of how much of your income you should spend on each category if you need ideas, but again, this is going to be personalized to you.
Now that you have a budget of how much you make, how much you (should) spend on each item, let’s come up with a plan for the future.
Step Five: Arrange your debts in level from lowest to highest (Debt Snowball)
Look at all of your credit cards, loans including car/student loan/mortgage and arrange them from the lowest total amount to the highest total amount. The idea behind a “debt snowball” is that as soon as you pay off the lowest amount, that monthly premium is automatically applied to the next loan. You already budget for that monthly expense so rather than keep the extra money once something is paid off, use it to pay off the next debt more quickly.
Step Six: Stop using credit cards
Credit cards are very convenient, making them very dangerous! It doesn’t seem like we are spending money when we just insert a piece of plastic into a machine! Studies have shown that we actually think twice about a purchase when we use physical money. For me, I load a pre-paid credit card each month just for gas. It is convenient but controls my spending. Other than that, I automate my payments for my fixed expenses and use the Envelope System for the remaining items.
Step Seven: Set up autopay
Set up payments through your bank account that automates things like rent or mortgage. I start with the most important first (housing, car, loans) and schedule them on days after I get paid. If your mortgage is due on the first day of every month, set up the payment for the 20th of the month before to avoid it being late. Set up the rest of your automated payments earlier in the month after your first paycheck since those will most likely be lower than rent or mortgage payments.
Step Eight: Use the Envelope System (for variable costs)
Make a list of your variable costs and how much you want to spend. Figure out if that money is coming out of your first paycheck or your second. For example, if your monthly grocery budget is $500, take $250 from your first paycheck and $250 from your second paycheck. This is the part that can be tricky and takes a few months to fully figure out.
Take a blank envelope, label the category on the front (groceries, gas, entertainment, extra) and place the amount of money that you have budgeted to spend into each envelope. This can also be tricky if you have to go to the bank and get out an exact amount. Make sure to try to keep your budget easy by nearing to the closest tens!
Step Nine: Budget blow money
Set money aside for you to spend on whatever you want to spend it on and DON’T FEEL GUILTY! This is part of self-care. You need to have time to relax and treat yourself, and sometimes that takes money. Use this to get a massage, or eat out with girlfriends, or try a new class. (see my post on Self-care activities here) You will feel better knowing that you are being financially responsible and spending within your budget.
Step Ten: Set aside money for misc/unexpected (Plan to save an Emergency Fund)
Now that you have your fixed costs and have a budget for your variable costs, you should have some money left over. If not, go back to each category and see if you can figure ways to cut costs a bit more. Use this extra money to set up an Emergency Fund for things like a broken refrigerator or car repair that you weren’t expecting. It’s life and these things will happen, so planning for them really helps alleviate stress. Also, if you can earn any extra money by babysitting, dog-walking, or additional side-hussle, put it into this category as well and don’t count it as income.
Once you have an emergency fund established (suggested is at least $1,000) then you can decide what you want to do with the extra money that you have. You can either pay ahead on your debt snowball or adjust your spending. But this will give you a good head start!
Sample monthly budget
Step 1 Income after taxes: $4,000
Step 2 Fixed Expenses: $1680 (42%)
Mortgage/Rent: $1,000 (25%)
Car: $320 (8%)
Utilities: $200 (5%) Some utility companies, like PP&L, have a program where you can pay a fixed amount every month. This helps with planning for spending and is adjusted throughout the year based on your energy use.
Cell phone: $80 (2%)
Netflix/Cable/internet: $80 (2%)
Step 3 Variable monthly Expenses: $560 (14%)
Kids Activities: $100
Step 4 Yearly Expenses: $5,800 per year, or $483/month (12%)
Insurance (car, life, disability): $1,800 per year
Steps 2-4 added together: $2,723 monthly expenses
Income – Monthly Expenses= $1277 left each month
The rest of that money each month is divided into the following categories:
Savings (10%): $400
Blow Money (5%): $200
Emergency fund/Debt snowball (all remaining money): $677
This is just a sample budget and yours will look different depending on your income and expenses, however this is a basic way to set up a budget which is essential to managing your finances. If you need help with this process, I am happy to help you create your budget. My online services will be available on the “Work with me” page coming January 1, 2019.
A budget is telling your money where to go instead of wondering where it went ~ Dave Ramsey