During a long winter spent indoors, many of us search for anything to distract us from a looming sense of cabin fever. After cycling through different hobbies, you might find yourself considering something you never thought you would: your budget.
Although it may not be your first example of a good time, it’s something. Once you’ve caught up on your Netflix queue and cleaned up the apartment, it may be the only thing stopping you from going stir crazy.
It’s also a great way to make sure your finances are on track. A household budget is an essential financial tool at any time of the year. If you aren’t sure how you can create a budget that helps you do all of the above, make sure you ask these three questions.
1. How much do I make?
You may already know this answer if you pay close attention to your paychecks. However, it could be complicated if you juggle multiple jobs, do jobs under the table, or work freelance.
If you have multiple streams of income, you’ll need to spend some time tracking them to find out how much you make. Your income represents one of the building blocks of your budget, so make sure you add everything up carefully. You need an accurate figure for your weekly, monthly, and yearly income.
You should also note the difference between gross and net income. Gross is your total earnings, while net is what you take home after deductions like taxes and insurance. There’s likely a big difference between the two.
Make sure you always use net income when tabling your budget, otherwise you’ll believe you have more money coming into your accounts than you have to spend. It may inflate your sense of wealth, leading you to overspend.
2. How much do I spend?
You may already be overspending if you haven’t asked yourself this question before. To get an accurate answer, you should look back at your finances for the last three months and track every purchase.
Most financial advisors suggest this retrospective look back because it lets you average out your typical spending habits over a quarter of a year. This will give you a better understanding of the trends impacting your spending compared to looking at just one week.
Once again, accuracy is important for this step. Don’t overlook small purchases just because they cost you less than $5.
When done correctly, this exercise will reveal the cumulative effects of your spending. By omitting something, you won’t get the full picture, so treat every tiny bill as if it was as important as housing, groceries, or even installment loan repayments.
As you look through your finances, categorize your purchases into common groups like insurance, housing, entertainment, and food. Once you’ve tallied everything up, you’ll see which category consumes the most of your money.
3. What’s left for emergencies?
Now equipped with your net income and a full list of spending, you’ll be able to see how much of your paycheck you retain each month.
Most financial advisors suggest you have anywhere between 15 and 20 percent leftover to go towards fun spending, an emergency fund, debt reduction, and retirement. The latest research, however, shows the majority of Americans don’t have anything left. Four out of five people live paycheck to paycheck.
When you don’t have any cash to contribute towards an emergency fund, you won’t be able to take on unexpected bills or repairs. If someone were to steal your winter coat from a restaurant’s coat hook, would you know how you’d buy a new one? If your fridge broke down, would you be able to pay a repair person to fix it?
For those people who answer no, there are online lenders like MoneyKey that can help bridge the gap between paychecks. These lenders offer an alternative form of lending through online installment loans and lines of credit, so people can cover unexpected expenses quickly — even if they don’t have savings of their own. If this sounds like something you could use, dive into the world of online lending to get more information.
Ideally, however, you’d have savings to cover something like a broken fridge. By asking yourself this third and last question, you’ll be able to face the reality of your budget as it stands now. If you have no room for savings, you should look back to your list of spending to see if there’s an opportunity to trim the fat.
Look at categories like food and entertainment to see if you can cut back on frivolous spending, and use anything you free up to put towards savings.
The winter doldrums have their advantages — especially if your restlessness helps you focus on your budget. By answering these questions, you’ll create a budget that stands up to reality.