Budgeting Part 2 – Five Easy Steps to Make a Budget that Helps You Win with Your Money

Easy budgeting?  Isn’t that an oxymoron?  Sure, budgeting is often overwhelming, but let’s make it easy!

Before we jump into the specifics of making a budget, I encourage you to take 10 minutes to read part 1 of this series.  In that post, I explore the common myths surrounding the budgeting process and talk about the truth you need to know.

Are you ready to take control of your finances?

Between you and your spouse (if you’re married), whichever one of you is more inclined towards numbers and details will write the first draft of the budget.  You’ll assemble everything below and then you and your spouse will sit down together, review the draft, and make the changes needed. 

If you are not married, find a friend (not a shopping buddy) who can help you edit your budget.  This should be someone who understands your financial goals and can keep you accountable.

Easy budgeting step 1: Write down this month’s take-home pay from all sources of income.

Get a pencil and download the free budget template (above) to make your first budget.  Don’t worry about getting an app or software program for now.  You’ll make a better decision on which program you want once you’ve been doing this for 90 days. 

List each source of income and how much you expect to receive from each source.  Write down take-home (net) pay, not gross income.  Take-home pay is the amount of money to be transferred to you after income tax, Social Security and Medicare tax, mandatory insurance  payments, mandatory retirement contributions, and other required items are removed. 

Make sure to include all sources of income from you and your spouse including salary, bonuses, extra money from side jobs, income from selling things, tax refunds, and any other money that comes to you.  Add all of these up and that is this month’s “Total Income.” 

Easy budgeting step 2: List your expenses.

This is where you will decide where to allocate every dollar of your total income and give it a specific assignment.  There are a lot of ways to do this, but here is the method I recommend.

Giving

Even if you are just starting out and you don’t feel like you have enough money to be able to afford to give  any of it away, put something down in this category.  As an evangelical Christian, this is 10% of my budget as a tithe to my local church, right at the top before I allocate money to anything else. 

That was really hard for me in college and medical school when my total income was really low.  Every dollar I gave felt like I was putting myself further behind on my goals, but I still stuck with it.  I’m really glad I did.  If you don’t build the habit of giving when you have very little money, you won’t do it when you have a lot of money. 

So, I recommend you allocate money to giving, right from the start.  Regardless of your religious or non-religious stance, generous people are generally more attractive people to be around.  I encourage you to be a giver!

Savings

This number will fluctuate dramatically over the course of your life, depending on your amount of debt, income level, and current financial goals.  15% is a good percentage to start with, but I would recommend starting with no less than 10%.  In the beginning, it’s also ok to make this category 0% and allocate that money instead to debt elimination.

Basic essentials

After this, your next few lines will be the basic essentials to run your house.  These include:

• rent/mortgage payment (including renter’s/homeowner’s insurance)
• basic utilities (water, electricity, gas, sanitation)
• food
• transportation (car payment, money for public transportation, insurance, gas, car repair)

Once you have these items down, you can feel comfortable knowing that you’ve at least got a roof over your head, a way to feed your family, and the ability to get back and forth from work. 

If you’ve gotten to this point and your total expenses are greater than your total income, see if there’s something you need to trim in your budget. 

Maybe you need to decrease or eliminate the restaurant portion of your food bill.  Maybe it’s time to drop cable or satellite TV.  The other possibility is that this is an indication you need to increase your income by picking up extra shifts, moonlighting, or getting a side job.

Other expenses

Next, write down all of the other expenses that you have, including minimum amounts of all debt payments.  Take a look at credit/debit card purchases from the last three months to get an idea of what you’re spending your money on.  Some items to consider might include:

• tuition for daycare or kids’ school
• clothes
• insurance premiums
• prescription medications
• pet care
• eating out
• vacations
• gym membership
• society membership dues
• medical licenses
• hair care
• entertainment 

This is not a comprehensive list, but it’s a good place to start.  You’ll probably find in the first month that something unexpected comes up, so you’ll just need to remember to plan it in your budget the next time. 

Once you have the expenses listed, add them all up and write that total amount as your “Total Expenses.” 

Easy budgeting step 3: Get to zero.

Most likely, your total income doesn’t equal your total expenses yet.  Your objective is make sure every dollar you have in income is assigned to some specific category under your expenses.  The term for this is a zero-based budget.  You want the total of your income minus your expenses to equal zero. 

For example, if your total expenses are less than your total income by $500, go back up to your expenses and increase one or more of the expenses categories by a total of $500.  This could mean increasing savings by $500, or maybe increasing savings by $200 and adding $300 to a credit card payment.  However you do it, give every dollar a specific mission.  If your total expenses are greater than your total income, you need to reduce the amount allocated to one or more categories of expenses or increase your total income. 

If you’re nervous about having enough money left over at the end of the month to ensure you don’t go into overdraft, add in a category called “cushion” or “buffer zone.”  Put $100-200 in that category that you can draw from if it turns out that you dramatically underestimated your expenses and need to pull money from somewhere.  Don’t make this category too big, or you’ll end up inadvertently spending it on some unnecessary purchase.

Easy budgeting step 4: Track your expenses and stick to the budget!

Now that you have a working budget, it’s your blueprint.  You and your spouse need to agree to make no purchases other than what you specifically allocate in this budget unless you first look at the budget together and agree to adjust your budget to make the desired purchase.  Consider this budget to be a contract that neither of you can break without mutual agreement. 

The budget is only as good as your ability follow it. 

For the next 90 days, track your expenses closely.  For as many of your categories as possible, I would encourage you to use cash.  You’ll pay much closer attention if you use cash for your purchases than you will if you spend with a credit card.  Don’t worry about missing out on those airline miles for a few months.  We are building habits that will save you money in the long run. 

Each week, take a look at your expenses compared to the amount you budgeted at the beginning of the month.  If you’re reaching the maximum amount of money budgeted, adjust the budget with your spouse so that you have enough to make it to the end of the month in each category.

Easy budgeting step 5: At the beginning of the next month, start a new budget.

Each month, you need a unique budget.  Your expenses and income will vary month to month, so your budget will be different each month.  You can’t just “set it and forget it.”

If you expect a big change in your income or expenses in a given month, try to anticipate that as far in advance as possible.  When you know you have a major home repair that will be needed in six months, save 1/6th of that amount each month so you can pay cash for it in six months. 

If you get a big bonus, decide what you want to use that for, but be intentional!  Don’t just say, “Hey, let’s take a vacation!”  If that’s what you want to do, it’s fine, but be sure that you and your spouse agree that decision is consistent with your long-term financial goals. 

Conclusion

One of the most consistent characteristics about the average millionaire is that they are intentional in how they plan their lives and their finances.  No one ends up winning a gold medal and looks around from the podium in astonishment and says, “How did that happen?”  Winning is the result of years of dedication, hard work, and intentional planning.  The budget will free you, support you, and guide you towards achieving your long-term financial goals.  It is the most important money habit you will ever develop. 

In part 3 of this series, we’ll discuss how to budget when your income varies from month to month.

Leave a comment below and tell us how we can help you as you are creating your budget. 

 

Further Reading

• Budgeting Part 1 – You WILL Fail Without a Budget
• Budgeting Part 3 – How to Budget on an Irregular Income
• Financial Goals: Begin with the End in Mind
• You Can Be a Millionaire, and You Should!
• You Can’t Afford to Not Be Good with Your Money
• What to Do if You Want to Retire with Enough Money
• The Beginner’s Guide to Student Loan Management
• How to Get Rich Fast (and Why You Shouldn’t Try to Do It)
• The Emergency Fund: The Account You Need That Won’t Make You Money
• View from the Trenches: Lessons Learned from Years of Financial Coaching
• Four Steps for Calculating Your Net Worth
• Generosity is the Cornerstone of Any Good Financial Plan
• 7 Little Changes That Will Make a Big Difference with Your Income
• Who Is on Your “Personal Board of Directors?”
• You’re Doing Your Insurance Wrong.  Here’s What You Need!
• How to Get Rich Fast (and Why You Shouldn’t Try to Do It)

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