Before we discuss how to go about making a budget, let’s discuss why you should have one.
A budget helps you to figure out exactly where you are financially. Just like it take more work to get where you want to go if you get off at the wrong bus stop without realizing it, getting your financial life in order is possible without a budget, but it’s a lot harder and takes a lot longer. Consider Kelly, a 25 year old blind woman who has a full time job and collects SSDI. She lives alone and is working to pay off some student loans. She feels like she is living paycheck to paycheck and wants to find a way to save money for a down payment on her first home.
Kelly has never created a budget before because she always thought it would be too hard. It’s not as hard as she thinks.
Kelly’s first step is to list all of her sources of income so she knows exactly how much she makes. Because she gets an SSDI check every month, a paycheck from work every two weeks, and a yearly holiday bonus, it will be helpful for Kelly to figure out how much money she makes in a year.
- SSDI: $16800/year
- Work: $26000/year
- Christmas bonus: $500/year
- Total: $43,300/year
Kelly’s next step is to list as many monthly expenses as she can think of, multiplying each expense by 12 to figure out how much she spends in a year.
- Rent: 18000/year
- Student loans: 3612/year
- Food/personal items: $5200/year
- Internet: $780/year
- Uber/Lyft: $1820/year
- Bus pass: $780/year
- Netflix: $119.88/year
- Aira: $276/year
- Hulu: $77.40/year
- Apple Music: $192/year
- Total: 30857.28/year
Are you surprised to find out that Kelly thinks she spends $12442.72/year less than she makes? She is, because she still feels like she never quite has enough to get by at the end of each pay period, even though she works hard to find the lowest prices and she keeps an eye on her account balances. Still, she has a better idea of where she is now than she did before.
If Kelly wants to become financially independent, she’ll need to start putting money aside for emergencies and longer-term goals like buying a home. By creating a budget, Kelly knows that she could be setting aside up to $12442.72/year for her goals. That is much more than she thought possible, and she now has hope that she can build a 3-month emergency fund in as little as eight months. Was a budget worth her effort? She thinks so…