If you’re looking to move up in house, or become a first time home-buyer it helps to have a financial plan of how to achieve those goals. And having a plan for a major financial decision starts with writing a budget. Don’t be afraid, a budget doesn’t necessarily mean that you are going to be eating beans and rice every day or that you’ll never buy new clothes again. Heck, if the word budget sends shivers down your spine, you can call it Cash Flow Planning and sound trendy and professional.
Don’t let life happen without a plan!
Having a budget just means you’re making life happen with a plan. Your plan can include all the fun and flexibility you want it to, you just need to make a conscious choice on your priorities. Here’s a quick introduction into the world of budgets, so that you can get started today and reach your goals.
There are a wealth of resources and tools available in the digital world to create and maintain a personal budget, but to get started it can help to break out pencil and paper and be a little old fashioned. If a new house is your goal, saving is going to be crucial, so let’s look at a way to plan on spending less than you earn, so that at the end of the month you have money left to save. A zero based budget, in which income minus expenses equals zero, is a great way to plan to save and it is very simple to write, even if you’ve never balanced a checkbook, you can do it! We’ve put together a basic template with some common items listed to help you get started, and a blank template for you to personalize as you wish.
To start writing a budget, determine what your monthly income will be and write it at the top of the page, this is what you have to work with, so this is all the money we will spend. The next step is to write down all of your planned expenses. Some things like rent and insurance rarely change and are easy to put on paper, other items like gas, food, and medical expenses can be more variable and will take some thought to come up with the first time. Have no fear, it gets easier every month that you create it (No two months are identical, so yes, you will need to write a new budget every month).
When planning your expenses, it helps to think in specific categories, and prioritize these categories as they fit into your plan. What most people consider the four most important categories are Food, Housing, Transportation, and Personal expenses. Plan your spending for these categories first as they are you most basic expenses, and enable you to have a roof over your head, some clothes on your back, some food in your belly, and a way to get to and from work.
After you’ve input all of your essential expenses (a 2500 channel cable TV package is probably not essential) figure out their total and subtract that from your total monthly income, this new amount is what you have to work with for your remaining budget categories, and if your goal is to move up in house we want to free up as much money as possible to go into the savings category. This is the point where you have to decide if you would rather go on a shopping spree or save for a new home. List and total your remaining expenses into the appropriate categories, common categories to utilize are Debts, Insurance & Taxes, Savings, Giving, and Recreation.
Remember, your goal is to have all of your expenses combined be equal to your monthly income. If the numbers don’t work out, look for places you can make changes. Some good things to look at for overspending include your restaurant spending, recreation expenses, car payments, and emotionally based spending.
Living on a budget allows you to set and reach your goals.
Now that you’ve written your first budget (congratulations, you’re officially strange now) it’s time to track your spending so that you can make a better budget next month, and hold yourself accountable to your plan. There are numerous systems and online tools available for tracking your expenses, and all of them can work, as long as you stick to it. The simplest way to start is to physically write down your expenses on the same piece of paper that you wrote your budget on, that way you can compare your plan to reality and you can see the areas in your plan that need more work. Don’t stress too much, more than likely, you’ll be changing your plan a few times in the first few months, but once you’ve got a system that works for you, you are on the path to success. Remember, small sacrifices in lifestyle now, can lead to immense happiness and success in the future.
Most of this information isn’t new or revolutionary, more than likely, it’s advice that your grandparents would give you. A great place to learn more about this style of budgeting is from the leading authority Dave Ramsey, there are numerous great articles and tools available throughout his website, especially if you are interested in learning how to start dumping debt. Additional information about types of budgeting can be found on WikiHow or Investopedia.