How to Budget and Save Money? (10 Easy Steps to Financial Freedom)

Are you struggling to make ends meet? Are you living pay cheque to pay cheque?

Or maybe you are on the blessed side and you don’t need to worry about money, but do you know how much you earn and how much you spend? Do you not fear that maybe one day, your card will be declined while purchasing a very important purchase?

You will be surprised how a simple budget can help.

Let us be real. Wherever you are in life or no matter how big or small your income is, budgeting should be a very important part of your life!

What is a personal budget and why it is important?

A personal budget is a plan on how you will use your monthly income to fund or pay off your estimated expenses for the month.

It is essential to make a budget because money is a limited resource but it is used virtually in every part of our lives.  We need money to buy food, to pay for our shelter, to afford kid’s tuition, etc. In other words. every items and/or activities in our life competes for our money, so if we do not dictate where it should go, then we can expect that it will disappear without a trace.

If you need more convincing why budget is important, then please read, “Why Budget is Important?”

Today, I will share to you my 10 steps to budget my income which helped me save money and live a financially-stress-free life for 30 years and counting.

My goal in writing this article is to give you step-by-step instructions on how to budget to enable you to have money when you need it.

10 Steps to Budget and Save Money

Step 1: List All Your Income then Add Them To Determine Total Monthly Income

The first step is to determine your after-tax monthly income. Make sure to list all of your income if you have more than one sources of income.

If you have an irregular monthly income, then determine your average monthly income. Summing up your monthly income for the past 12 years then it by 12. The number that you will get is the number that you will use on your budget

Step 2: List All Your Expenses

This step is the most tedious of all 10 steps but this is the most crucial step of budgeting because you need to get an accurate picture of where you spend your money.

Instruction for listing your expense:

1. Gather your bank statements and credit card statement. Preferably, get your statement of account for the last 3 months so you can get a better picture of your monthly spending (more is better).

2. Open up a spreadsheet software or grab your budget notebook.

3. Create two columns on your spreadsheet or in your notebook.

4. Put a header, “Description” on the first column, then put a header. “Amount” in the second column. You can also create one more column and name it “Comments”, but this is optional.

5. Lst down where you spend your money on the first column and write how much you spend on the next column.

Step 3: Categorize Your Expenses

Next, you will need to categorize your expenses whether it is a  “fixed expenses” or  “discretionary expenses”

Fixed Expenses (recurring bills) are expenses that you have to pay every month to avail needed services or products that are essential to your lifestyle.

Conveniently, these expenses are the same month after month so it is easy to allocate a budget to it. Unfortunately, these expenses are “necessity” thus it will be the last to go from our budget if we want to save.

Examples include the following: bus pass, home, and car insurance, etc.

Discretionary Expenses (spontaneous spending) are expenses that you spend to buy your “wants” and vary in amount and/or frequency every month.

Discretionary expenses are the first to go when we are trying to save because losing the services/product associated with it will not gravely affect our lifestyle.

These spendings are usually eating out, coffee trips, sudden vehicle repairs, emergency medical bills, unexpected school expenses etc.

Step 4: Sum Up Your Monthly Regular Bill then Subtract it from Your Total Income

Now that we have our total income and we are done categorizing our expenses into fixed and discretionary expenses, the next step that we should do is to determine how much of our income is left after we subtract the total fixed income from it.

Total Income – Fixed Expenses = Usable Income

Ignore the discretionary income for now because we have to use your usable income to pay off your debt, create an emergency fund, pay yourself first before you can use it to spend on your wants.

If the difference turned out to be positive, then it tells you that you have extra cash that you can use to save for rainy days, invest for your retirement or use it for your discretionary expenses.

On the other hand, if it is negative then you are in debt and appropriate actions should be done quickly.

Step 5a: If Your Net Income is Positive then Go to Step 6

Hopefully, you still have money left after subtracting your regular bills off your income. If you do then hold on tight and I will teach you how to make every single dollar of your work for you of Step 6 to Step 9.

Step 5b: If Your Net Income is Negative then Go to Step 10

If you determined that you are in debt, then I would recommend you to read my article on How to Pay Off Debt Quickly

Step 6: Open an Online Savings Account for an Emergency Fund, Decide a Percentage of Your Excess Income to Transfer, Set an Automatic Monthly Transfer

The first thing you should do with your usable income is to allocate a portion of it to your emergency fund.

Log in to your online bank or go to your local bank, then open an online saving account and name it Emergency Fund.

It is up to you what percentage of your “surplus” income you will allocate to this fund, but I want for you to make it a goal to save up an equivalent of 4 to 6 months of your salary.

After deciding how much you will put per month, then set an automatic money transfer from your chequing account to your saving account. Your online bank should have this option but if you don’t know how to do it then go to your local bank or to your call the customer service and ask for assistance.

I have written an article about “Automating Your Personal Finance“. In this article, I showed steps on how to automate your finances to reduce the time required from doing a budget.

Step 7: Open a Registered Retirement Account or Tax-Free Savings Account, Decide a Percentage of Your Excess Income to Transfer, Set an Automatic Monthly Transfer

This step is exactly the same as Step 6. The only difference is you are opening a registered retirement account or tax-free savings account instead of an online savings account.

That being said, you should determine what percentage you will put to your retirement plan then set a monthly automatic transfer.

Step 8: Open an Account for an “Expected Spending” Fund, Decide a Percentage of Your Excess Income to Transfer, Set an Automatic Monthly Transfer

The principle is the same with Step 6 and Step 7 except that you need to have an idea of what are your “Expected Expenses”

For example:

If you are an extravagant gift giver, then you are probably ready to spend about $850 as average Americans do. Instead of buying now and pay later,  you should save at least $71 per month starting in January so you have money to spend when Christmas comes. You can still use your credit cards but instead of paying your bills after the season, you will be putting debit to your credit card before you buy gifts and you should not go above what you have deposited.

The idea works the same if you have a car for example. You know spending for an oil change and other car maintenance is part of being a car owner. So, why not save a small amount every month instead of panicking where to get the money on the day of your car maintenance. Again, use your credit card as a debit card or in other words, deposit money into your credit card before using it.

These are just an example. Your expenses would be different and your priorities will be not the same. The important lesson to be taken from here is you should be aware where your money goes, set aside money before you the purchase date, then use cash to buy these things instead of putting it on a credit using your credit card. This way, you will avoid paying interest fees.

Step 9: Open an Account for a “Life and Leisure Fund”, Determine Future Life and Leisure Expense, Set an Automatic Monthly Transfer

You should know the drill by now. This step is the same as step 8, but instead of saving money for Expected Spending, you will be saving your money for a future vacation or future “luxurious” big purchases.

For example, if you are planning to go on a vacation in 12 months, then determine how much the cost of the vacation is then divide it by 12. The amount that you will get is the amount you need to save every month for the next 12 months.

I separated this step from 8 even though they are the same because I believe that it will motivate you to save if you know you can use your money to purchase something you really love to do. On the flip side, if you run out of money in step 8, then this step should take a back seat until you figure out how you will cut your spending.

Step 10: Allocate Money for Guilt-free Spending Fund

If by the end of your budgeting and you still have some money left, then use that money for your “Guilt-Free” spending account. You can use this fund for your random purchases like spending on food cravings, trending toys, on sale makeups of video games, etc.

If you are using a credit card then automatically transfer what is left to your net income to your credit card at the start of the month. You would want to see your credit card on a “negative” on day one of each month. You will then stop using it once the balance reaches to zero. 

If you are thinking of purchasing an expensive item and it is not in your budget, then don’t use up all your balance so it grows every month!

Unfortunately, in this example, we are short $300 so no money can go to the guilt-free spending account. If this happens to you, then the solution is to play around on how much you will allocate for each expense. The important thing that I want you to do is to ensure that your “Final Income” should be zero. Likewise, if your Final Income Left is more than $100 then readjust your allocation again.

Conclusion:

Creating a budget is easy and straightforward. In a nutshell, you just need to know how much you earn and tally all of your expenses. Your goal is to make sure that the difference between your income and your expenses is zero. If not, then you need to eliminate or reduce your expenses.

Part of budgeting is to forecast how much you will be spending in a period of time. Once known, you have the responsibility to set aside a portion of your income every month so you can be financially at peace when the time when you need to pay your bill comes.

It is important to save for your expenses and not to take a credit. There is a proverb in the Bible that says,

“The rich rule over the poor, and the borrower is a slave to the lender” – Proverbs 22:7

We may come from different faith, but we can all agree that this passage speaks truth. We can deny the reality, but the fact is if you have a huge loan, then you are basically living your life working for your lender.

What do you think?

Does this post help you on how to budget and save? Did you learn anything new? Are there steps that you disagree or confused?

Please feel free to give me some feedback! Leave some comments and make sure to like our Facebook Page!

But Wait, There is More!

If you are looking for ways to make extra income, then I highly recommend that you check out Wealthy Affiliate. See my personal review of the site here!

If you want to learn more on how to budget then I suggest that you read Dave Ramsey’s Complete Guide to Money or The Total Money Makeover