How to Budget
- brad06154
- 2 days ago
- 7 min read
In this blog:
Getting control of your income is the single most important thing you can do to ensure long-term financial success. Whether you’re paying down debt, catching up on bills, or trying to save for the future, learning how to manage your cash flow can change everything. This guide will allow you to make your money go toward your top priorities instead of wondering where it went.
Step 1. Create your first budget
Creating a budget is not all that hard. It requires a little attention, and discipline – but you can do it. What many people don’t realize is that budgeting is an iterative process. The first time it will not work out very well. Stick with it, you will get better. It will be worth it.
A. Define Your “Why”
You should ask yourself why you want to get control of your money.
Do you want to retire? Buy a house? Travel? The more specific you can be about what you are hoping to accomplish, the better. If you want a house…. Describe it. Where is it? How big is it? How is it decorated? And what characteristics do you love? The more specific you are, the more real your “why” will become.
You can and should revisit this step periodically. It will help refine day-to-day spending priorities. Maybe more importantly, it will provide motivation to stick with your plan. It is a lot easier to spend money on a whim when a better alternative hasn’t been identified.
You are likely to revisit this step over time – and that’s good.
B. Calculate your monthly income
Start by figuring out how much money comes in each month after taxes. Include:
· Paycheck(s)
· Freelance or side income
· Child support or alimony
· Government benefits
· Any other income
If your earnings vary from month to month, you may use history to create an estimate.
C. List your expenses
If you haven’t been tracking your expenses already, there may be some guess work involved in this step, but that’s fine. It may be helpful to review previous bank statements, credit card statements, or any bill files you may have. Here are some common categories that might help you think about where your money goes:
Fixed expenses are the monthly bills. People are often surprised to see how much money they already have committed every month. Fixed expenses often include:
· Rent or mortgage
· Utilities
· Car payment
· Insurance
· Phone bill
· Internet
· Childcare
· Minimum credit card payments
· Loan payments
· Streaming services
Variable spending changes from month to month. For many, spending in these categories sneaks up on them. Coffee shops and meal deliveries may not seem expensive, but they can really add up. Some examples of variable spending:
· Groceries
· Restaurants and takeout
· Entertainment
· Gas
· Shopping
· Personal care
· Travel
D. Identify other priorities
Based on your “Why” you’ve defined, there are probably some things you might want to consider spending money on that you haven’t in the past. You may wish to add one or more of the following:
· Emergency savings
· Extra debt payments
· House down payment fund
· Travel fund
· Retirement
E. Balance your budget
It is time to turn this into a real plan. You need to assign dollars to every line item you have written down. Some of them like rent will be an obvious number. Others, like groceries, may be a little more of an estimate for now. Don’t forget to assign dollars to all your income and to your other priorities like debt or savings.
Now we need to do a little math. If you are an excel jockey – it might be a good time to break out a spreadsheet. If not, the calculator on your phone will work just fine. Many choose this time to go to an app. (I like both EveryDollar.com and MonarchMoney.com, more on that later). Choose whatever makes you most comfortable, but we need to know if our total income is more, or less than our total expenses.
If income is bigger, congratulations. However, you still have work to do. You need to give every dollar a job. That means every dollar is either paying a bill, paying down debt, or going to savings. Don’t just leave it with money left over – give the extra money a job. Put it toward debt, emergency savings, retirement, or your next car purchase.
If expenses are bigger, you have some work to do. If you can find spending to cut (or additional income) to fix the issue – GREAT! Make that change. For some people, it will take time. Get it as close as you can to balanced and start thinking about what you need to do in future months to make it better.
Step 2. Track Your Spending
There are multiple ways to track your spending. Pick the one you are most likely to do consistently.
The old-fashioned way is to write everything down and add it up. You probably will need to monitor bank transactions and possibly credit card transactions to include everything. This approach can be a little tedious and error prone; but it makes you very aware of the money you are spending. Some use this approach, but use a spreadsheet to record everything and add it up.
A more common approach is to use an app. MonarchMoney.com and EveryDollar.com are both decent choices, and easy to learn. They can be accessed using your browser on your computer or they both have an app for your phone as well. They allow you to update budget amounts for each category and connect to your bank and credit cards. Transactions automatically get recorded in the app where you can categorize them. Both tools have multiple functions in addition to budgeting. For most, it is best to start with just the budget functions.
Step 3. Review your spending
It is a good habit to categorize your transactions almost daily. It takes about 3 minutes, you can do it while the coffee is brewing in the morning. Look at the transactions from the previous day and put them in the correct category. If you forgot a category in your plan, go ahead and add it. However, do your best as you go not to let your planned expenses exceed your planned income. Make adjustments to the plan as you need to.
Make a mental note of any categories that are at risk of going over budget so you can adjust your spending accordingly. Many people are appalled the first time they learn where their money is really going. That’s fine – you are learning, and this is a necessary step.
Step 4. Repeat for next month.
At the end of the month, review how it went.
You could just copy everything from this month and move it to next month’s plan. However, the process will work much better if you incorporate new learnings every month. For every category compare your actual spending to the plan. Ask yourself “Do I need to modify the plan? Do I need to modify my spending?’ Initially you will probably be modifying both quite a bit. Create a draft plan for the next month based on what you learn.
Then consider any special items for the upcoming month. Any birthdays or other gifts you need to buy? Kid’s activities you need to pay for? Identify those items that are special just for the upcoming month and add them to the upcoming month’s plan.
Now, the plan for the next month has to be balanced. If your income is greater than your expenses – find a home for the “extra”. Update the plan to show you will pay down some debt or save money for one of your priorities.
If your planned expenses are greater than income, you will either need to increase income, or reduce expenses. The first few months it may be there is only so much you can do to bring expenses in line. Afterall, much of your spending is a commitment. Do the best you can, but identify lifestyle changes you might need to make in the future. You can’t spend more than you bring in indefinitely. There may be job, residence or car changes needed to bring everything in line.
Over time, your actual spending will begin to look more like your plan. For most, it takes about 3 months for the budget to become accurate. The better you become at creating and adhering to a plan, the better you will be at eliminating debts or saving for future goals.
Once you have a budget in place, and are ready to make "the most of it", you should check out two other budgeting posts:
Frequently Asked Questions
Are there suggested percentage guidelines for spending categories?
There are many suggested guidelines written by many experts. In my experience, there is not a set of guidelines that are appropriate for all people. A budget for a family of four looks very different than one for a single individual. Where you live, your current debts and saving priorities all affect the correct budget for you. I believe the best guideline is learned by working with a budget for 3 or more months. You will learn where your money goes and make changes based on your own priorities.
A few boundaries you may wish to keep in mind. It will be easier for you to achieve other financial goals if you spend less than 30% of your monthly income on mortgage or rent. Saving 15% of your income for retirement will ensure you have something to live on when you stop working.
What is the best budgeting app?
The best budgeting app is the one you will use consistently to control your spending and save money. I have seen people succeed using a spiral, a pencil and a calculator. Others use a spreadsheet. Successful budgeting is more about mindset and discipline than app features.
If you are just looking for an app suggestion to get started, here is a list of the basic required features:
- Record a monthly planned spend for each category
- Record a monthly planned income
- Allow posting of transactions to the categories
- Report on actual spending vs plan for each category.
- Allow the user to modify the plan as needed
Two apps that do these things well are: EveryDollar.com and MonarchMoney.com. Often the decision between these two apps comes down to which works best syncing with your bank.
Can a budgeting plan help reduce financial anxiety?
Yes.
A budget enables you to make your money go where you want it to go. People feel empowered, and like they can finally make some progress with their money. Having a clear plan based on your priorities creates visibility and helps you make decisions with more confidence.
Brad Ormesher is the owner of Three Points Financial Coaching, and a Certified Financial Coach. You may schedule some time to speak with him (no obligation) using this button.
