How You Should Budget Your Money
You can live a debt-free life by using a few simple principles.
A very important lesson they do not teach at school is how to budget your money. Start learning now and you can live a debt-free life.
Create a Spreadsheet
The first thing to do is create a spreadsheet that you can keep all of your information in. I personally like to store this on Google drive because you can access it from anywhere, but the choice is yours. Create a separate sheet for each of the topics below.
As a personal preference, I like to have a summary page that I can quickly see the totals all next to each other.
What is your income?
How much money goes into your bank account?
Most people will have a 9–5 job with no other income so pull out your payslip and find out how much you are bringing it.
If you have a side hustle, calculate how much you earn and create another total. It’s important that your final figures are net, not gross, make sure that all deductibles, like tax, has been subtracted from the total.
What do you spend?
Next up is jotting down all of your bills for the month.
The best way I found to do this is to download your latest few bank statements and see what things you are paying for.
You can separate costs into different category’s like
- Subscriptions e.g Netflix, Spotify
- Living costs e.g Food Spend
- Work Costs e.g Buying Petrol/Gas
- Loan repayments e.g Student loan payments
Seeing all your spending in one place will make it a damn lot easier to adjust your spending on certain areas of your life.
Don’t feel like your numbers have to be exact, you cannot predict everything in life but having a general outline is very beneficially.
How much debt do you have?
Not the most fun number to find out but definitely the most important.
Although it sounds silly, it’s vital that you do not lie to yourself. It’s natural to want to avoid knowing the amount of money you owe but if you do not control it now you may never see the end of it in the future.
List out all of your loans of any sort, whether it’s student loan or car loan, add it to your spreadsheet.
Now that you know what you owe you can set out a plan on how you want to pay it off. It’s important to try and pay off any loans that are charging you interest first, that debt will be increasing the longer it is left.
Now, this is the fun part, it’s now time to budget how much you want to spend.
This exercise isn’t just about reducing how much fun you’re going to have to save money, it’s about being realistic. Personally, I like to order food on a Friday night to celebrate the end of the week, so I include that spend on my budget.
Now that you know what you spend your money on, you can adjust your spending in certain areas. Identify what is important to you and what isn’t, so that if you have a month where you need to reduce your spending you know exactly where to reduce it.
Build an emergency fund
Save some money for a rainy day.
You never know when your car will break down, or when your old computer will pack in, or even worse losing your job.
Having a backup fund will allow you to sleep at night knowing you will always be covered. The amount you save is up to you but here are a few options.
- The value of 3 months of wages/income
- 5k is a good start, 10k if you can afford to
Now it’s time to increase your wealth.
Investing your money can benefit you immensely over the long run. To put it in simple terms, due to inflation the value of your money is decreasing at an average of 2% a year.
So whichever way you decide to invest your money, as long as you are gaining 2% your savings are keeping its value, so that you should be your min target.
Here are a few ways you can invest
- Stocks — There are lots of ready-made funds that you can invest in, Vanguard is a good place to start.
- Pensions — Many companies will offer you a pension scheme where they will match your contribution.
- Other investments— Commodities (like Gold and Silver), Real Estate, owning a business. These will require more effort than just putting money into an account but the pay off will be much greater.
Using compound interest to increase the value of your saving’s year on year is a long term strategy that can build up your retirement fund at a faster rate, but you must leave the money alone to grow.
Knowing how much you spend, how much you owe and how much you save is much less stressful than being in the unknown. Take control of your finances now and live a debt-free life.