You know that sinking feeling you get at the end of the month? You open your bank account and check your balance and you realize it is actually down from where you were at this point last month. You are in the red. How did it happen? Is your lifestyle unsustainable? What if it continues?
You do the math. In horror, you realize you will be broke in a few weeks or months.
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Practically everyone goes through this experience at some point in young adulthood. That’s okay—it’s all part of learning how to be an adult. For whatever reason, they don’t teach this all-important stuff in school. So here are 7 steps to help you build a working household budget which is sustainable. After you take these steps, you’ll hopefully be back in the black.
1. Set some goals.
Start by figuring out what both your long- and short-term priorities are. Make a list of your objectives for the month, the year, and the next five and ten years. Figure out what is most important to you. Is it to build up your savings? Is it to raise startup capital? Is it to build up a college fund for your kid? How much will you need to meet all these objectives?
2. Figure out your income and expenses and come up with a sustainable monthly budget.
This is probably the single most important thing you can do. Make a list of all necessary monthly expenses and then start tracking your real expenses. How do your expenses compare to your income? Is there anything you can do to increase your income and/or decrease your expenses?
You work hard for your money—so figure out where it is going! If your expenses exceed your income, you must find a way to balance things out. If future changes eat into your budget, you must look for a way to compensate.
3. Curb impulse spending.
A lot of us spend money each month on things we don’t need. They may seem like small purchases at the time, but they can really add up.
Do what you can to cut back on items that are “wants” vs. needs. One great technique is to assign yourself a waiting period before you buy something you simply want. Take 30 days to think about it. Usually the impulse will pass. If it doesn’t, maybe it is worth it after all.
4. Start saving and get away from financial black holes.
It can be hard if not impossible to think about saving money when you are struggling, but you need to get into a saving mindset. At the bare minimum, you need an emergency fund.
“But I have to pay the rent!” While that is true, that is a black hole. If you are in the red month after month, throwing all your savings at rent is not going to save you. Obviously this puts you in an untenable position, but this is where you need to find a way to make a lasting change.
Move into a cheaper place. Apply for a better job. Get outside help if you can. Save your savings for something really useful—like relocating to that better job, starting a business, or changing your life in some other lasting way.
5. Implement your plan and maintain it.
Your budget is not a “set or forget” prospect. You need to be actively involved with it on an ongoing basis. Throughout the month, do regular checks to make sure that you are on track. Add up your receipts, and come up with a way to mathematically compensate for irregularities in your cash flow.
Try to pay bills the same time each month. Subtract deposits you have been paid on uncompleted work and add in money you are owed but haven’t been paid yet (or come up with an alternate system that you like).
You don’t want to budget too obsessively, so come up with a schedule. You can run the numbers two or four times a month for example. Do it on the same days.
Whatever your system is, your goal is to come up with a way to measure exactly where you stand against last month. If you notice you are behind on meeting your goals, immediately identify the problem and tackle it as best you can.
What if you earn unevenly throughout the year? I suggest coming up with a budget based on the months when your income is lowest and sticking with it. This ensures a sustainable lifestyle. On months you earn more, you will save more.
6. Create a system for unusual expenses.
While most expenses are monthly, some are not. There are those DMV fees you owe once a year … that unexpected tax bill … that car repair or plumbing bill coming up. Come up with a system for dealing with these expenses, or they will eat into your bottom line in unexpected and unpleasant ways. One great idea is to set up a fund specifically for these bills. Add to it whenever you have any extra income.
7. Consider getting expert advice.
If you are still having a hard time, it may be worth it for you to turn to expert financial advice. Most young people these days cannot afford a traditional financial advisor, but you can consider a robo-advisor like Betterment. Some robo-advisors like Personal Capital can even help you to track your net worth automatically.
Creating and maintaining a working monthly budget isn’t easy, but you can do it! It may require you to make some large and small changes to your life, but in the end, all your hard work will pay off. You’ll save more money and be able to enjoy some valuable peace of mind!