By: Dale | The Money Guy
Getting on a written budget is one of the greatest things you can do for your overall financial health. It doesn’t matter how large or small your income is; if you don’t have a plan, your money will find somewhere else to go. It will go to costly meals at restaurants, extra items in your basket at Target and to Amazon deals of the day…every day. It will disappear at craft stores, gun stores, and amusement parks. No matter how much you make, if there is no plan we tend to spend it all and then some in the form of credit cards.
Budgeting is seen as being a bad word, but it’s not. Your budget isn’t restrictive. If done correctly, your budget helps you out of bad financial situations and gives you permission to spend money on the things you value.
Step 1: Prepare
Budgeting requires honesty and self-awareness.
- Gather every financial statement you can. This includes bank statements, investment accounts, recent utility bills, and any information regarding a source of income or expense. One of the keys in the budget building process is to create a monthly average, so the more information you can dig up the better.
- Record all of your sources of income. If you are self-employed or have any outside sources of income, be sure to record these as well. If your income is in the form of a regular paycheck where taxes are automatically deducted, then using the net income (or take-home pay) amount is fine. Record this total income as a monthly amount.
- Create a list of monthly expenses. Write down a list of all the expected expenses you plan on incurring over the course of a month. This includes a mortgage payment or rent, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, student loans, retirement or college savings — essentially everything you spend money on.
- Break expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the same each month and are required parts of your way of living. They include expenses such as your mortgage or rent, car payments, cable and/or internet service, trash pickup, credit card payments and so on. These expenses, for the most part, are essential yet not likely to change in the budget. Variable expenses are the type that will change from month to month and include items such as groceries, gasoline, entertainment, eating out, and gifts, to name a few. This category will be important when making adjustments.
- Total your monthly income and monthly expenses. If your end result shows more income than expenses, you are off to a good start. This means you can prioritize this excess to areas of your budget such as retirement savings or paying more on credit card balances to eliminate that debt faster. If you are showing a higher expense column than income, it means some changes will have to be made.
- Make adjustments to expenses. If you have accurately identified and listed all of your expenses, the ultimate goal would be to have your income and expense columns to be equal. This means all of your income is accounted for and budgeted for a specific expense or savings goal.
- If you are in a situation where expenses are higher than income, you should look at your variable expenses to find areas to cut. Since these expenses are typically non-essential, it should be easy to shave a few dollars in several areas to bring you closer to your income.
- Review your budget weekly. It is important to review your budget on a regular basis to make sure you are staying on track. After the first month take a minute to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve.
Step 2: Find a Good Budget Spreadsheet or Application
There are thousands of different spreadsheets, lists, programs and applications you can use to write up your monthly budget. Some people love using a spreadsheet and others like using a program or application like YNAB or Every Dollar.
Step 3: Set Financial Goals
Your financial goals will be unique to your situation so I can’t tell you what your goals should be, but I will ask a few questions to spur your thoughts.
- Do you have an emergency savings fund? Many people have less than $1,000 in savings. If you have inadequate savings, your budget can help you find the money you need.
- Do you have credit card, auto loan, student loan or medical debt? Put it all into a debt snowball or debt avalanche plan and add it to your monthly budget.
- Do you have children? Have you started educational savings accounts for them?
- Do you have an IRA, 401K or another retirement account? Are you putting away 15% of your pay into retirement savings?
- Do you want to travel or take vacations? Do you usually go into debt for them? Save up each month and enjoy a paid for vacation.
- Is your car or major appliance on its last leg? Put away a set amount monthly in a replacement fund.
Step 4: Calculate Required Living Expenses
Using the budget spreadsheet or program that you chose in step 2, list out your required expenses, such as housing, food, utilities, and any other expense that can’t be put off until another time. These are the most important items in your budget. They are the things you can’t do without. The things you can’t do without may not be the same as someone else’s. That’s okay. Your budget reflects what you need and what you value most. Many of these expenses are fixed amounts, but others are a little more fluid. Rent is typically the same from month to month, but sometimes that goes up. For example, food and fuel are expenses that may change from month to month based on how much you decide to drive or which foods you plan to eat. I prefer to break down expenses as much as possible, but you can do it the way that’s best for you.
Step 5: Determine Savings Amount
Many people in the personal finance world will tell you to pay yourself first. I agree with this in a way. I would say, “make sure you pay yourself as much as you can.” If you’re out of debt you should be saving every month. How much is up to you, but make sure you are saving. If you have debts to pay off, you should be focusing on those first after you have a couple thousand in savings. Once you’ve built up a large emergency fund of 3 to 6 months of expenses, this savings should be turned toward retirement accounts, college savings, investments, and home ownership.
Step 6: Determine Debt Repayment Amount
If you have debts that need to be paid off, figure out if you want to use the debt snowball or debt avalanche methods to pay them all off. Once you have them all listed and know the minimum payments, start working your debt elimination plan. Pay your debt off as quickly as you can, but make sure you aren’t making detrimental decisions in the process.
Step 7: Calculate Optional Spending
Optional spending. This is the category my wife, The Money Gal, loves the most. After the required and the intelligent financial decisions have been made, this is where you have to start getting really smart. What other things do you want to spend your money on? A little bit of entertainment, a hobby, basically any other category that isn’t a necessity goes here. It is important to have something. If you don’t set aside any money for anything fun or enjoyable you will steal from other categories, mess up the budget and quit. Be frugal, but be kind to yourself. Don’t quit.
Step 8: Finalize
After you have everything listed out with dollar amounts next to them take a look and see if there’s anything else you can think of that isn’t accounted for. I usually write up a draft budget and then The Money Gal and I meet together to go over the line items. She reminds me of the different things I forgot in this month’s budget and we amend the budget as we go. We do zero-based budgeting, so we aren’t done until we have budgeted every dollar that we brought in. To do this and not risk overdraft on your checking you need to make sure you have some extra cash in your account.
Finalize your budget after you have adequately allocated your spending plan, come to an agreement with your spouse, taken as many variables into consideration as possible, and ensured you’ll have enough money in the account to cover it all.
Step 9: Track Spending
My budget form is also where I track spending. The grid to the right of the planned and actual columns in my budget form is where I enter all of our spending for the month. It’s pretty simple, but it can feel like a lot of work at first. If you decide to use an app or program to do your budget, they will most likely have a place where you track your spending. By tracking your spending you can see if you’re on track. If the food budget is $600 and you’ve spent $450 in the first week of the month, you and your spouse need to know where that line item is at and ensure you can make it through the month.
Step 10: Review Weekly
We do a weekly review of the budget and our spending so we can see what we’re on track with and if we need to make any changes. These weekly review meetings are about five minutes long. We look at the numbers, discuss anything that’s changed and make sure we’re still on the same page with our spending plan.
Step 11: Make Adjustments
We make adjustments during these budget review meetings. Sometimes we find that we will not need to spend as much on something as we thought and we have money we can move toward something else. If you think your budget will be perfect at the beginning you’re wrong. It takes time. Give yourself a little grace. Keep at it and you will make progress.
Step 12: Lather, Rinse, Repeat
At the end of the month, it’s time to come up with a new spending plan. There are many things that are the same month to month, but in a house like mine with two parents and four kids, no month is the same and I’m not going to treat every month as if it is. You need to learn how to budget in a way that holds to certain principles but also works in a way that makes it easy for you to follow. No budgeting plan will be easy at first, but given some time you can learn to live on and love having a budget.
I’ll say it again: Your budget isn’t restrictive. If done correctly, your budget helps you out of bad financial situations and gives you permission to spend money on the things you value.
Republished with the permission of MyBestFriendTheMoneyGuy.com.
Steve handles the operational side of Rockstar by keeping the systems running smoothly, social media accounts active and curation buttery smooth. He also answers to the name “Do-It-All Boy”.
Steve is also the founder of ThinkSaveRetire.com – a site where he shares ideas and techniques on how to retire from your 9-5 job and start to enjoy the virtues that life has to offer outside of full-time work. Life is about more than fluorescent lights and gray cubicles!