Creating a budget is an essential first step to getting your financial house in order after your divorce. If you don’t know where your money is going, you can easily get in over your head and end up in the poor house.
It’s practically impossible to gain control of your finances without first creating a budget. Credit card debt and loans, or unexpected payments like medical bills can easily get you into a desperate situation.
Many people rich and poor cringe at the thought of creating a budget and never do. It may be because they simply don’t know how, or believe it’s too difficult and takes too much time. I’m sure you’ve heard stories of millionaires that have ended up bankrupt because they didn’t know how to manage their money.
If you’ve recently been divorced, it’s likely your financial situation has drastically changed making budgeting an even higher priority. The truth is, creating a budget that you can live with is pretty simple and you don’t have to worry about following it religiously. Here are 8 simple things you can do now to get going:
Creating a Budget is Easy
1 – Eliminate the Negativity. If the word “budget” has a negative connotation to you, consider it as your “spending plan”. Instead of viewing the plan as restrictive, think about the things it allows you to buy. After all, a budget is nothing more than a plan with guidelines for how you will spend your money.
2 – Identify All Sources of Income. The basics include salary, alimony, child support, social security, and distributions from a pension or 401(k). You should also identify income from other sources such as dividends, sales commissions and bonuses (if applicable) overtime pay, and rental income, etc.
Once you’ve determined all income sources, simply total all items into a single net monthly number. This net monthly number is essential in determining how much you can afford to spend. It should be fairly easy to gather this information, most of which should be detailed on your tax returns.
It Doesn’t Have to be Perfect
3 – Track Your Monthly Expenses. Take an initial stab at this by reviewing all of your bills along with your bank and credit card statements. You need to also track your cash outlays for at least a few weeks to get a good sense about that stuff too. Don’t worry about getting it perfect at this point.
The first step is to simply gain an understanding about how much you are spending in major areas such as housing, insurance, automobiles, utilities, clothes, recreation, your children, and food.
4 – Categorize Each Expense. Typically, your expenses can be classified into two categories; fixed and variable (or discretionary). With fixed expenses such as your mortgage or rent, medical insurance or taxes, there’s not much you can do to change these.
Discretionary expenses such as vacations, dining out, and other entertainment typically provide the greatest opportunity for savings.
5 – Document Your Findings. Seeing it on paper has a powerful impact and you need to make sure you write it down. You will also need this information to ultimately follow your budget to be sure you stay within the spending limits you’ve identified.
Alternatively, you could purchase a software program to help and can check here for a recent review of some of the best personal budget software apps. Or, you can download the free Excel Budget/Expense Worksheet offered below:
This free worksheet has over 140 different types of predefined common expenses so you don’t have to think about them yourself. It will also automatically provide totals for each category and expense type and graphically represent them as well. Once complete, you will have a crystal-clear picture of everything you currently spend money on. Here’s a small sample of what this free worksheet tracks for you:
Take a Closer Look and Do Your Homework
6 – Review and Update Your Numbers. After the initial pass, take another look at your expenses and refine the numbers you originally came up with. You may have left some items off or incorrectly estimated the expense amounts. Again, perfection is not needed, but you should make sure you’ve captured all of your major items.
7 – Determine How and Where You Can Save Money. Before making any changes to your spending plan, you should first figure out how you can save money on the essentials. There are many ways you can save money to consider.
For example, changes to your insurance policies or the interest rate you are paying on your home loan can save you big money. Start saving BIG money now by discovering and completing the easiest and most impactful things you can, and without changing your lifestyle. Once you have gone through this process, you should revise your expense sheet with the lower figures.
Determine the Least Painful Areas to Cut
8 – Cut Back Where You Can. Although this is the least desirable path to take, it may be necessary. The first place to focus on is your discretionary expenses. These provide the greatest opportunity for reductions and you may find some low hanging fruit here. Review each item and establish the bottom line number for each one. This number should obviously be lower than what you are spending today.
Next, take a look at your fixed expenses to see what you can eliminate there too. You may have a fixed expense for a car you can no longer afford and may need to consider selling it.
Your ultimate goal is to determine how to reduce your overall expenses to be at or (even better) below the net income you identified in step 2 above. Keep working at it until you achieve this objective.
The Bottom Line
Despite its negative connotations, a budget is really just a tool you can use to put your personal finances on the right track. If the most successful companies must budget their spending, it makes sense that anyone managing a household should also control their expenses in a similar way. With the tools provided here, budgeting your money will be greatly simplified. Get started today and begin to take control of your spending, and set yourself on a path to reach your financial goals.