Writing a budget might be the most avoided essential personal finance item. Why?
Because it seems hard? Because it seems restricting? Because we don’t know where to start?
I’ll be blunt, all of those reasons are wrong and they are excuses. That’s okay, we all make excuses for things we are avoiding, but deep down we know they will make our lives better.
Budgets aren’t hard, you probably already divide up your money in some fashion otherwise you wouldn’t be paying the rent. An actual written plan for every dollar that you make might be a little different, but it’s still not hard.
Budgets aren’t restricting. You are in control of your budget. You decide where the money goes, a budget just gives you the ability to choose where you want it to go before you get paid.
Virtually every person I have ever coached in writing a budget has said afterward… “I feel like I got a raise”.
Lastly where should you start? Right here:
Step 1: Tally Up Your Expenses
Look at your prior expenses. Online bank statements or credit card statements are perfect for this. If you use lots of cash it might be trickier, but start writing down everything you spend or keep the receipts.
Write down your fixed expenses. Rent/Mortgage, Water, Electricity, Garbage, Phone, Internet, Insurance, Transportation, etc. Anything that is close to the same every month or is a necessity. This is where your budget’s foundation will be built.
Now write down your variable expenses and categorize them. All of your grocery store purchases in one column. All of the restaurant purchases in another and so on with things like clothes, gas, recreation, health, personal expenses, and miscellaneous.
Once you have those written out add them up to get an idea of how much you are spending in each category per month. Write that number down.
This step might be the hardest because it’s the one that requires you to start taking action in the first place. Do it. Making a plan to win with money is one of the best things you can do. It will give you peace because you will know that you have direction in an area of life that can feel unstable.
Step 2: Write Down Your Budget Categories
Write down all of your categories (everything you spend money on) in order of most important to least important.
My biggest piece of advice here is do not over think it.
Do not divide your categories down to things like, “laundry detergent” or “toothpaste”. That is too detailed. Stick with a bigger category like personal expenses.
Lauren and I include those items in our general grocery budget. Anything purchased at the grocery store falls under grocery unless it is something very unique. That keeps it easy.
Also do not stress over what is more important. The key is to get critical items at the top of the list, think: Food, Shelter, Clothing, and Transportation. Then beyond that you can list them how you would like.
Include any debt payments in the list as well.
If you still aren’t sure you have everything I will show you my budget in step 3.
Don’t forget two critical items: Saving and Giving.
Saving is critical to any successful financial plan. Rule of thumb is about 10% of your income. In some instances where you might be facing significant debt it should be less. In most cases 10% should be about right.
Giving is just as critical to financial success. I have yet to meet or work with anyone who is living a fulfilled life that is not giving in some form or fashion. Give to causes you care deeply about. Give an amount that is significant to you. By doing those two things you allow yourself to see beyond yourself and to realize the full impact you can make on something that matters to you.
For Lauren and I saving and giving are our top two budget items.
Step 3: List Your Income And Start Filling Out Your Budget
You now have a list of your budget categories and you have written down the amounts you spent in those areas in the past. Use that as a guide.
Now write your monthly income at the top of the page. This is take home pay. For me, I get paid 2 times per month, I simply take the direct deposit amount and multiply it by two.
Now write a list of your categories just like in step 2. Start writing in the amounts of your fixed expenses next to their respective categories. Again this is your expenses like rent, utilities, and any fixed payments on a car or credit card.
Now write in what you think you need in each category that is left based on your prior spending habits. Groceries, food out, clothing, saving, giving, etc.
Look, you have a budget, almost!
Here is an example of my recent budget and below there is a budget we use for Lauren’s pay that might help you out if you are paid on commission or in irregular amounts:
Some important notes. I only count my take home pay when I write my budget. Before I see a dollar my paycheck is reduced automatically to cover Health Insurance, Dental Insurance, 401k contributions, and Taxes.
I don’t have line items to cover those because they come out before I really have a choice.
You will also notice that on the items at the bottom starting with “Gas”, I have a per week amount. That per week amount gives us a guide for what we should spend each week so that we don’t go over budget on items that are more frequent purchases.
I don’t have line items for debt payments except our mortgage because we are committed to living without debt. You might have those in your budget and that is okay, just make sure they are in there and aim to pay them off early!
We also have an emergency fund already, so there is no emergency fund saving category. For a long time that was a saving item in our budget. If you don’t have an emergency fund absolutely start building one up.
Alright here is our budget for Lauren’s paychecks:
The difference here is that Lauren is paid hourly and she doesn’t work full time. Her work is very seasonal so sometimes she could get just a few hundred every paycheck and other times she might get over $700 or more.
If you are paid commission/irregular pay the best way to approach a budget is to figure out what your potential worst month could be and budget for that. At the bottom of your budget add things that you would like to have money for but aren’t necessities.
If you are paid more than you planned for this month, work your way down the list of added line items at the bottom of your budget and go as far down as you can until every dollar has been assigned a purpose.
In our case Lauren’s check is going to cover Giving, College Funding for the kids, Vacation saving, and a Remodel fund that we have been trying to build up.
There is a running total column in the middle that helps us to see how far her check will go. For example, if she got a check for $300 that would be enough to cover giving, college savings, and vacation saving, but that would be it. Remodel savings would have to wait for next time.
But let’s say she got a $700 check, we could cover everything on the list and more. In that case we usually talk about what we want the extra to go toward. Usually we just add it as an extra saving for that kitchen remodel. But it’s important for us to check with each other to make sure nothing else has come up as an important item for the month.
Step 4: Get The Budget To Zero
This form of budgeting is called zero based. Basically the goal to assign every dollar to a category so that at the end you get to zero.
You will notice that in my budget there is a zero at the bottom. The sheet takes my pay and subtracts all of my categories as I work down.
This step is critical.
You don’t want a negative number at the bottom because that means you are overspending what you earn. If you get a negative number just go back and rework some of the non-essential categories to make up the difference.
You also don’t want a positive number. Why? Because that means you left money unaccounted for. Money that does not have a purpose gets… spent, usually on random junk that you don’t need.
So if you have a positive number at the bottom either add some to your categories above or use the extra to save for something that you have been dreaming about.
Step 5: Stick To Your Budget
This part can be tricky, you have it all on paper but now you have to actually live it.
I won’t sugar coat it, this will be the hard part. The first time you write a budget you will forget things. (Birthday presents, field trips, car tabs…) That is okay, the more you do this the easier it will get.
When you forget something just go back and make an adjustment. The unexpected will happen. But over time you will start to anticipate the unexpected and your budget will account for it.
For Lauren and myself budgeting has become second nature. We have been following a budget for a decade. It took time to dial it in, but at this point budgeting takes us maybe 10 minutes before the month begins and then I spend maybe 15 minutes a week to ensure we are on track.
It took us longer when we first started and it will take a bit to get started for you too. Give yourself some grace and don’t be afraid to make adjustments as you go.
Also a huge help at first is using cash. Give yourself cash to spend on discretionary items like food out, that way you know how much you have left at any time and you cannot exceed your budget by accident.
Conclusion: Every situation is different, but budgets are similar across the board. They aren’t hard but they do take focus. Money is such a critical area in our lives, it deserves extra focus.
That focus will lead to peace, reduced stress, and a feeling of direction.
It will enable you to pursue your dreams vs hope for them.
Life comes with a lot of uncertainty and nothing you can do in any area of life could prepare you for every possibility, but taking control of your finances helps to limit that uncertainty. And it prepares you to easily handle many of the challenges that will come your way.
That security is worth a lot. The positive benefits to your relationships and health are priceless. Take the time to take control in this area. You can do this, it’s worth the effort!
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