Whether your money trees are blossoming out back or you’ve just landed your first job, creating a budget is key to understanding just exactly where your money goes and how to keep more of it.
All too often I’ve seen people spend money recklessly, forcing themselves into a not-so-very-fun game of catch-up with no end in sight.
Following this two-step process below will not only help you prioritize your spending, but also put you in a position to build wealth over time.
Step 1: Understand What You Make and What You Have to Spend
How can anyone keep track of their hard-earned money without knowing what comes in and what goes out? This is really the crux of creating a budget that actually works, so I'll spend some extra time in this area.
The first thing you need to know is how to calculate your discretionary income. Discretionary income is the money you have left after paying for necessary expenses (including taxes).
Now please, I’m begging you, do not include as a necessary expense the Jordans coming out on Saturday because you need something to match your new outfit. And definitely do not include a night out for dinner because you need to try the lobster roll at that fancy spot for restaurant week.
Necessary expenses should include, but may not be limited to, the following:
Rent or mortgage
Utility bills
Credit card bill
Phone bill
Grocery shopping
Car payments
Taxes
School loans
Insurance
One thing I’d like to point out; If you are an employee of a company, you probably have taxes withheld (or taken out) from your paycheck, making things a bit easier to manage.
If you are an independent contractor, there's a chance that you do not have taxes withheld from your income (unless requested). If this is the case, it’s a good idea to set aside an estimated amount of what you will owe in taxes the following year. This way you’re not checking in between the couch for loose change when the IRS bill comes around.
What I do
Since most of my necessary expenses are due once a month (and I’m sure yours are, too), it’s best for me to think about discretionary income on a month to month basis.
Most of my bills are due in the first half of every month, so I like to designate the paycheck I receive at the end of the month to all my bills in the following month. Doing this helps to clear my mind of everything I need to pay for a whole month (and keeps my stress levels low).
Of course, I understand not everyone is in a position to do this. The key here is to prioritize these expenses over unnecessary spending. If you know spending money on something you don’t need will make it hard for you to pay your bills on time, then you just have to be strong and hold off (it is what it is).
This is why tracking your monthly discretionary income is important; you know exactly what you can and can’t afford before the money is in your hands. If you need help keeping track of everything, check out our budget template and some of the ways we can help you create and manage your budget each month.
Step 2: Find a Home for Your Discretionary Income
After calculating your discretionary income, and actually paying those necessary expenses, you now have a bit of freedom with your money. Remember those new shoes you couldn’t live without, or that dinner you were dying to go to? Go on and treat yourself! Life is too short to not do the things you enjoy.
But as we get older, our tastes usually become a bit more expensive, which means you’ll need more money for the things you want.
Tired of hearing your parents telling you to take out the trash? Or maybe you’d rather put your rent money towards a mortgage? Consider stashing some money away in a savings account or certificate of deposit (CD) for a downpayment down the road.
It’s also likely you don’t want to work forever (like myself) and are looking to make your money work for you. Investing in the stock market or even real estate is a great way to build wealth if you’re smart about it.
The point here is, it’s likely you are going to want something that will cost more than just what you have left over from a couple of paychecks. Even if you don’t know what that is just yet, there are alternatives to just spending it on things you don’t need.
Oh, and we can’t forget putting a little something on the side in the event things get tough. As 2020 has showed us, things can go left without warning. It's a good idea to have an emergency fund that will last you for 3-6 months just in case.
What I do
One thing I like to do with my extra money is invest in income-producing properties. Living off someone else’s money has been a dream of mine for a few years now, and this is one way to do that (literally and figuratively).
I also have a stock portfolio, but I’m a little more timid when it comes to putting my money there due to its unpredictability. But if you have some extra money you can afford to lose, and you think you have what it takes, this is a great way to build wealth without having to do anything at all!
Take Action on Creating Your Budget:
Figure out your income and necessary expenses for a given month. If you need help keeping track of everything, check out our budget template and how we can help you stay on top of your money.
Determine what you want to do with your extra cash. It’s ok to enjoy what you earn, but don’t forget about the future.
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