Why is budgeting important?
(1) Having a budget is the key to getting out of debt, breaking the paycheck-to-paycheck cycle, helping you save and showing you what you can and cannot afford. Today, I'm going to show you 12 simple steps to creating a budget. Plus, I'm going to give you a free budget template. Like free stuff. Like this video now. Right now, right now and hit the subscribe button. And if you like saving money, then you'll love another upcoming video from us soon on this channel. You won't want to miss it, so subscribe, ring the bell for notifications.
(2) I'm J Bryan Jones, writer and content manager at Just One Dime. I used to live in one of the most expensive cities in the United States; Los Angeles, by only earning $12 an hour. Oh my gosh. How did I make it by on that? Okay, so for reference, that's $7 per hour under the Living Wage in L. A. , according to MIT. And that's also at the extremely low income level line in L. A. ,
(3) according to the U. S. Department of Housing and Urban Development. And yet, not only did I make it okay living alone, walking distance from downtown, mind you, thanks to budgeting, but I saved money and it helped me get to where I am today.
How Budgeting Works:
- The only way budgeting works is that when you keep track of all the money coming in, all the money going out and you invest any difference. This means you end up with a net zero so that every single dollar is accounted for.
Get your free budget template calculator:
Calculate your income after taxes:
(1) Step two, calculate your income after taxes. You have to know what cash is going in and what you have available to spend. You should always be taking in at least as much money as you are taking out. Take an average of your paychecks. So if you're an hourly worker, don't make the mistake of going: “OK. I make $15 an hour, 40 hours a week, 52 weeks in a year. So if I just multiply 15 by 40 by 50, do it.
(2) No, don't do that. Actually, go into your bank accounts where you deposit your paychecks, add them up as far back as they go and take the average. I know most of you hate math, but here's an example, it's really simple. Let's say you made $1,100 in January 15th, right here on the calendar and $1,000 on January 31st. February 15th, $1,080 in February 15th and $980 February 28th. So then you made, add those up, $4,160 over two months. Divide how much you made
(3) by the number of months to get your average monthly income. In this case, $2,080. If you don't have taxes automatically taken out of your paychecks like I do, I recommend that, then you have to account for taxes and subtract them from the equation because you don't want to spend money they don't have that, you know, the government took. Your next thing to do under this step is to enter your income into this budget calculator.
How to Calculate Your Budget
(1) On the left-hand side of the sheet here, enter up to three different sources of income. For example, if you're married and have two incomes, then enter those. This is for your whole household, pets and kids included, too. This spreadsheet will add up the total income amount right here. Notice when you type in the income, lets do, $2080, sticking with the example. There is, these are adding up. Here's the total income amount right here and these filled in. So the spreadsheet will calculate your recommended monthly spending in the peak spending thresholds. The peak spending threshold means that if you spend more than that,
(2) you are going over the maximum spending limit, economists recommend. You'll notice that in the total spot, it says 87% here and 145% there. So why would we recommend this? That's because if you add up all the recommended numbers, it'll eat up 87% of your income. So this is kind of like a baseline of what to spend. If you spend at your peak spending threshold then you'll be spending 145% of your income or put it another way, 45% more than what you make. So don't push all of your spending to the limit. You can't do all of this.
(3) This is kind of like a range. This is the most any economists would ever dream of recommending that you spend in each budget category. So if you go over any of these spending limits right here, these are going to be flagged red over here. Let me just show you what I mean. So this is $728. Let's say that your expenses right here are $729. Boom, this is highlighted red. So that's to show you this is the problem area that you need to address and lower. Between these two numbers is the range at which you should be spending. Once you put in your costs, you'll see what percentage of your budget
(4) you actually spent and how much you have left over, or how much you're in the hole. For each category here, you will enter in the costs for your entire household. So, for example, pet food comes out of the food budget and kids clothes comes out of the clothing budget. Some other templates will separate those. Not a good idea. Just have these come from the same sources. This is the simplest, most logical way that we can make this.
Calculate your housing budget.
(1) Step three, calculate your housing costs. Oh boy. So the recommended by economists is 25%. This peak spending threshold, when it's a problem, is 35%. Place your necessary expenses in the column here. So let's say you got a pretty cheap place, let's say, $600. This is regular occurring, something that you can't really be flexible with. It's not like you can negotiate with your landlord one month. “Oh, can you bring it down a little bit? ”
(2) Or: “What if I just pay less? And I use this room less. ” It doesn't work out like that. So you rent or mortgage is going to be a consistent amount of money. But consider other housing costs. People don't think of this all the time. Place these in the optional recurring column right here. So maintenance like pest control, let's say pest control is $2 a month. Air conditioning filters, that's every once in a while. Let's add on, let's say, another $10 for there.
(3) So then it's $12 when even it out. These are absolutely worth it. But if you had to, if you absolutely had to, you could cut these and save money. Sometimes you got a rough and a little bit and then you can live better later. One-time expenses are irregular costs that you'll make over the life of your home. They're irregular and they won't happen each year. For example, if you buy a lawnmower, stay in your fence. Those are one-time costs. Too many people spend too much of their budget on housing. It is definitely one of the best places to save money in your budget.
(4) I know that home costs have gone up, wages not so much, but you really just got to keep searching and find something that's right for you. It may be less than your ideal, what you grew up with, which class you think of yourself as. Get rid of that. Just think, what can I afford? I need to stay within this 25 to 30% range.
Calculate your food budget.
(1) Calculate your food costs. The recommended spending amount is 10% of your total income, and the peak spending threshold is 15%. This means that food for everyone in your household should be under 15% of your monthly income and ideally should be under 10% of your income. Your food costs are likely all recurring costs. You know you go in there all the time. It's not something that's going to stop.
(2) And unless you have a medical condition that requires a very specific diet or food, then you don't have any fixed food costs. In this column, here are the necessary expenses. Yes, I know you need to spend food in order to live. You can really bring it down. It can go up and down, ebb and flow. The optional spending here in this column is not going to be zero,
(3) but it can cut down from, let's say, $350 per month, and let's say you cut it down to $300. See, this whole spending optional column is here to help get you into the mindset of these are where I can make cuts, go through your big statements and total up all of the expenses from where you shop for food. If you pay with cash, then you'll have to keep track of that in the future. It's much easier to keep track with card, but that's a different conversation. Calculate your transportation costs so this is either public or private.
Calculate your transportation budget.
(1) Calculate your insurance costs. Recommended 10% of your budget in this area and up to 20% for your peak spending threshold. So instead of housing insurance, go under your housing budget and your car insurance, going under your transportation budget, all of your insurance goes under this section. That can also include life, health insurance, pet insurance.
(2) Too many people didn't know that this existed, pet insurance is great. Dental insurance and any other type of insurance you can think of. You should spend between 10 and 20% of your income on insurance. You may have to shop around to get it all within your budget, but do it. You're spending more time to find places to save, and it's going to be worth it because especially if you're going to save more than what you make per hour, invest that time, save that money.
Calculate your utilities budget
(1) Calculate your utilities costs. Recommended 5% of your budget it is peaking at 10%. Don't spend more than that. These are going to be recurring expenses, but they'll change from week to week. So it's kind of like, where do you draw the line here for necessary and optional, right? So necessary are things like fixed costs and maybe a little bit of like: “If I cut my electricity down to all of the other lights are off and I'm just running the fridge. ”
(2) I don't know if you can figure it out. But then that would go in unnecessary expenses because optional spending is where you're supposed to have that mindset: “This is where I can make cuts. ” Make sure you go back as far in your history as you can in your bank statements and calculate the average monthly spent. Be sure to include electricity, gas, trash and internet. These costs are usually less flexible than other things like clothing. But if you're over budget for utilities,
(3) save where you can by cutting back on resources like electricity and getting energy efficient light bulbs and appliances, if your housing budget allows for it. Because these kind of budgets, these categories here, they're all kind of intertwined, you know what I mean? If you have any sort of confusion about what goes under which category? Comment below. We'll answer your questions.
Calculate your clothing budget:
- Calculate your utilities costs. Recommended 5% of your budget it is peaking at 10%. Don't spend more than that. These are going to be recurring expenses, but they'll change from week to week. So it's kind of like, where do you draw the line here for necessary and optional, right? So necessary are things like fixed costs and maybe a little bit of like: “If I cut my electricity down to all of the other lights are off and I'm just running the fridge. ”
- I don't know if you can figure it out. But then that would go in unnecessary expenses because optional spending is where you're supposed to have that mindset: “This is where I can make cuts. ” Make sure you go back as far in your history as you can in your bank statements and calculate the average monthly spent. Be sure to include electricity, gas, trash and internet. These costs are usually less flexible than other things like clothing. But if you're over budget for utilities,
- save where you can by cutting back on resources like electricity and getting energy efficient light bulbs and appliances, if your housing budget allows for it. Because these kind of budgets, these categories here, they're all kind of intertwined, you know what I mean? If you have any sort of confusion about what goes under which category? Comment below. We'll answer your questions.
Calculate your clothing budget.
Calculate your recreation budget
- Calculate your recreational expenditures. This is probably where you’re like: “Oh, oh no, I like my fun. ” It's OK, it's OK. Just keep it all in line. You get to spend on this. It's part of your budget. You're allot for it. Please yourself.
- So we recommend about 5% of your total income goes towards the recreational expenses, and it's a problem if you're over 10% of your budget on this. This is how much cash can go towards stuff like movies and cable TV. You don't just get Netflix, right? Games, theme parks, concerts. That works. Add up all these kinds of expenses in your bank statements and check your monthly spending to make sure you're on track.
- If not, you know it's spilled milk, spilled coffee, spilled cash, you can get it back. Don't hate yourself up too much. Just be more cautious and cognizant in the future. Half of the point of making this is so that you understand about how much you spend, you know, not necessarily keeping track of every single dime. But, you know, it’s when you first started out, you really should.
What is your personal miscellaneous budget?
How much should you save in the short term?
- Calculate your personal miscellaneous expenses. So we recommend 5% of your budget spent towards personal miscellaneous and 10% is the peak spending threshold. If it didn't belong in any of these other cost categories and it's not a savings or investment, then it goes here. This will include things like haircuts $15. How often you get haircuts? Soap, toilet paper, random cost of living type stuff, toothpaste. So let's say that's all in $110. How much should you save in the short term?
- Calculate your short-term savings. “Wait J. Savings? I thought they were supposed to go in the same thing. It's all just one category, right? ” Wrong. That's old thinking. You have to separate your short term savings and your long-term savings. We recommend you spend at least 5% it as much as 10%.
- So we've separated these. Short-term savings is any money stashed away in your savings accounts, your checking account or investments that are easily turned into cash. We recommend that you keep six months’ worth of income as savings that can be easily converted to cash at any given time. If a rainy day comes, you can be ready for it and not have to worry about getting kicked out of your home. Once you have that nest egg, you can be more aggressive with your savings and place your cash into riskier investments
- that yield higher returns. Usually, that's the way it goes. The riskier it is, the better returns there are, and the less risky it is, the less you're going to get in your returns. If you have debt to pay off, like most of us nowadays, siphon this part of your budget towards repaying that debt.
How much should you put into long-term savings?
Where should you place extra money in your budget?
Secret Step 13:
