How confident do you feel about your financial future? If you’re unsure or perhaps a little concerned, you’re not alone. Research suggests that while 60 percent of women worry they won’t have enough money to last through retirement, only one in three have a detailed budget. It seems we’re all nervous about the future, but we’re not taking control of our spending habits. If that sounds familiar, it’s time to ’fess up and get your finances on track.
Step 1: Calculate Your Monthly Income
The first step is simple: Find your latest pay check to calculate your monthly income after taxes are taken out. This is the amount deposited into your bank account each month after deductions like 401(k) contributions. If you’re self-employed or paid on commission, take a look at the past four to six months to create a realistic monthly estimate.
Step 2: Tally Fixed Expenses
Next, list all the expenses that are non-negotiable. Fixed expenses are those recurring costs that you must pay every month because they’re vital for your well-being or are commitments you’ve already made. Think rent, utilities, and car payments. Also, be sure to include contributions to an emergency and retirement fund in this section—they should be treated as an essential cost.
Now, don’t forget about expenses that aren’t billed regularly. Some fixed expenses you don’t actually pay for in equal amounts each month, so come up with a monthly average, For instance, if you pay insurance just twice a year, calculate the annual amount you pay, and then divide by 12. Or if your utility bills fluctuate a lot, research the total you paid for a full 12-month period, and divide by 12.
Step 3: Estimate Variable Expenses
Now it’s time to chart your extra expenses—think clothes shopping, gym memberships, hair appointments, or money spent on going out. Variable expenses are those that can change each month or are discretionary. Try to think of all the ways you spend money. Going to the movies or to a local coffee shop are black holes for your money. Be sure to create separate categories just for them.
The key to accurately forecasting variable expenses is to call on past spending records. If you haven’t been keeping track, download a budgeting app like Mint or Level Money. Once you link your bank accounts, both apps automatically categorize your past expenses so you have months of spending data at your fingertips.
Next, analyze your habits, and try to create a spending guideline. Identify the areas that are the biggest financial drain, and question whether you could cut back on those costs in your budget.
Step 4: Assess What’s Left
When you subtract your monthly fixed and variable expenses from your monthly after-tax income, what you have left over is your discretionary income. In layman’s terms, discretionary income = monthly income – expenses (both fixed and variable). It’s your leftover money, which ideally should be put toward long-term goals, like saving for a property or putting extra money away for retirement.
The obvious goal is to grow your discretionary income and make saving a priority over spending. Decide how much you’d like to save each month, and then decide where to cut back. You have many needs and wants that are all competing for your limited resources. You have to decide the best way to balance your current expenses and saving needs so you never spend more than you make.
Step 5: Evaluate Your Budget
This final step is vital. Calculate what percentage of your income is put toward each area of the budget. Then review the budget and carefully review how you’re allocating money. Ask yourself, Is there a way you could be better spending your pay check? Are you happy with the amount you’re contributing to savings?
A popular way to divvy your budget is the 50/20/30 rule. This suggests that 50 percent of your income should go toward essential costs (fixed expenses), 30 percent should be allocated to lifestyle choices (variable expenses), and the remaining 20 percent should go toward financial priorities, like paying off debt or growing your savings account.
Good news: You’re done! Now that you’ve categorized your spending habits and assigned new goals, you should have a succinct budget to put into place. Don’t lose momentum though; now’s the time to test out your budget and see if you’ve set realistic limits.
Pencil in 30 minutes at the end of each month to check your budget and compare it with your spending habits. Budgeting is a work in progress, so be sure to fine-tune the categories and goals until you’ve got a workable personalized guide.
Now, ask yourself that question again: How confident do I feel about my financial future? After these five steps, you might find you have a very different response.