Most people miss the most critical step in the budgeting process which is process by which you track expenses. In fact, before any budget is ever created or developed I recommend at least one month of tracking expenses. It doesn’t matter how you do this whether it is on a note pad, an excel spreadsheet or a Google sheet such as I do but a detailed list of how you spend money is the only way to actually develop a budget to begin with. Oh and a little side note, this tracking process never ends by the way.
Once you begin tracking your expenses you can begin to classify them as fixed expenses or variable expenses in addition to labeling them into a specific category of your choosing. For example you may have fixed expenses such as your rent or mortgage payment, your cell phone bill, internet bill etc and variable expenses such as utilities, groceries, entertainment, etc.
As you evolve through your first month of tracking you can begin to formulate your very first budget from the tracking data you have and begin to see exactly where your money goes. The goal here is that by the end of the first month you want to have a preliminary budget set up that allows you to live within your income means. If you find that your budget is already over your income then you have no choice but to cut expenses. If you find that regardless of cutting you’re still underwater, then it’s time to pick up a second job or another source of income. Either way the entire purpose of a budget is to create margin, the difference between your income or your outgo.
With margin, the magic happens! Each month thereafter you continue to track expenses and follow the budget while using your margin to follow a few key steps. I like to advise at first setting aside $1,000 Fast Cash to hit off any short term emergencies, which are bound to happen especially since you’re now getting serious about your budgeting. Thereafter you can begin to strive towards a 3 month emergency fund. Then, and only then, you can begin to get aggressive on your debt reduction. Start with garbage debt such as credit cards first, then move onto the student and auto loans and finally the mortgage.
It is NOT an overnight process but over time, following this disciplined strategy your budget can the road map to financial success and most importantly financial freedom.
Good luck and get after it!