Understanding your financial habits is key to knowing why you have a certain amount coming out each month, and will help you eventually reduce that amount so you’re left with more in your bank account at the end of the month. Sound good/super scary and like lots of work? Awesome, here’s how to get started:
1. Figure out how much you make per month
This is the first step, the “what comes in” part. Gather your paychecks and calculate the net income (the amount you have left after taxes) to see how much money you’re taking home per month. If you’re a freelancer, that part’s a bit trickier. Collect all your invoices from the past year and add them up to see how much you’ve been making on average per month. If you don’t expect your contracts to change too wildly, go off of that monthly estimate. You’ll also have to factor in any taxes you might owe at the end of the tax year. If you have any dividend income you receive from investments, factor those in as well.
2. Figure out how much you’re spending on necessities per month
Now comes the “what comes out” part, which is decidedly less fun. Make a list of all of your monthly bills: rent, any subscription services like Netflix or Spotify, water, electricity, gas, mortgage payments, car payments, your phone bill, health insurance, gym membership, etc. These are also known as “fixed” expenses, or expenses that you have to pay every month and that usually stay about the same.
3. Figure out your variable expenses
These are expenses that aren’t necessarily fixed and aren’t necessary for keeping a roof over your head and the lights on. These are also known as “fun” expenses: money you spend on clothes, dinners out, happy hour drinks, trips, theatre and movie visits, grocery trip visits, and so forth. Depending on your lifestyle, this one might hurt a little to confront.
4. Add up all of fixed and variable expenses, and compare to income
Here’s where the simple math comes in. If your expenses are higher than your income (or you’re barely breaking even), it’s time to budget! (Here’s a PDF version to download too.)