When you first start looking at how to budget, you’ll see that there are many ways you can go about doing it.
But, no matter how you decide to budget, the same general principles apply. You should spend less than you make, build up savings and work toward your personal money goals.
One way to budget that is great for those with a variable income, or those who like to have a buffer besides just their emergency fund, is to start living on last month’s income. This can also prevent you from ever being stuck in the paycheck-to-paycheck cycle.
If you aren’t able to save an entire month’s worth of income right away, you can work toward living on last month’s income with these three steps.
Calculate the Amount Needed to Pay a Month’s Expenses
If you’ve already been budgeting, you probably have a pretty good idea of how much money you need to pay the bills each month. But if not, sit down and figure it out by seeing how much your bills typically cost each month. Once you have this amount calculated, this is what you will work to save up so you can start living on last month’s income.
For example, if you need $2,500 for your monthly expenses, then you’ll need to save at least that much in a separate savings account.
Create a “Buffer” for Expenses
Some people recommend you build up a buffer in your checking account, but I’ve found that having a savings account separate from my checking account works better for me so I don’t end up spending the extra money in my account.
In order for this to work well, you should probably open your savings account at the same bank that holds your checking account. This way you’ll be able to transfer the money into your checking account each month with a same-day transfer so you don’t have to wait several days for a transfer to come from an external bank.
It might take you a while to build up to $2,500 since most people can’t just come up with that much extra to start their monthly buffer right away. You could save $625 a month to have $2,500 in four months. This will take some discipline to cut back on expenses during that time in order to save up. You might also have to pay off some debt first.
Build a New Monthly Budget
Once you’ve saved $625 for four months, you’ll have $2,500 set aside. This will serve as the buffer for your expenses.
Now that you have a month’s worth of expenses saved for, you will then be able to budget this month’s income for next month. As long as you don’t end up with an unexpected expense, you should be a month ahead with your savings and be confident you can always pay your bills for the next month.
In fact, since you’ve been making sacrifices to live $625 under your monthly income (to build the buffer), you now need to decide how to use that surplus. Of course, it’s best to redirect that amount toward paying off any existing debt, building other savings accounts or invest it in the stock market.
Again, the main goal for living on last month’s income is to create a safety net so you don’t have to worry about where the money will come for bills or any unexpected expenses. By having the next month’s expenses allotted from the savings of this month’s income you can rest assured that your bills are covered.
If you have your buffer set up and are not having the stress of paycheck-to-paycheck living, then you can start to focus on larger savings goals. Remember, budgeting is about reaching your financial goals and finding the freedom to live the life you want.
How do you budget? Have you ever tried living on last month’s income?
Photo courtesy of: Green Chameleon