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There are 5 simple steps to create a budget, but why would we need one at all? Well, let me ask you this, have you ever come to the end of a month and asked yourself “where did all of my money go?”.
I think we have all been there at one point or another.
For me, it was at the end of one year when I looked at my tax papers and I said “I made that much money? Where did it all go?!”.
This is why I find knowing how to budget so important.
A lot of people see the budget as something bad, as a restrictor of their lifestyle.
This is not the case.
If you allow yourself to change your perspective, try thing of the budget as something that allows you to do certain things. A budget can allow you to spend when you want to. It will allow you to save when you need to. It does not restrict you from having fun, you can budget for that!
A budget is giving your money a clearly defined plan. It allows you to make decisions, plan for things and adjust things as you need to. Budgeting can give you clarity as to exactly what is going on with your personal finances.
5 Simple Steps to Create Your Budget
Step 1 – Choose a Budgeting Method
Determine what is going to be best for you when it comes to budgeting. Is it pen and paper? Envelope systems? An iPhone/Android app? I used an Excel Spreadsheet at one point, but that was a long time ago and I have since moved on from that.
My wife and I personally use EveryDollar and we LOVE it. There is a desktop version, but we primarily use the app. I have also heard of Mint and YNAB I just don’t know as much about the programs. I also know people that use the envelope system and they love it. Others use an excel spreadsheet and they’re happy… just choose something that works the best for you.
The goal here is not to do what everyone else is doing or only use a program or method because someone said so. The intention is to find something that works well for you.
There are two main things you should pay attention to when you are choosing a method for budgeting, process, and tracking.
Understand the Method’s Process
With the budget method you are choosing, is the process simple enough that you understand it? Are you able to do your budget easily without having to rework formulas and equations?
The process of your budget should be fairly simple, after all, my recommendation to you is to do your budget each month, before the next month begins! So if you’re going to be doing this frequently, then you definitely want a budget that is repeatable and easy to put together.
Make Sure Your Method Allows for Tracking
Secondly is the tracking aspect of your budget. You should know where you are at in regards to your budget at all times. You should be able to track your purchases, expenses, and income in your budget method and know how much was planned for, how much was spent and how much is remaining at all times. This will help keep you on track at all times since there won’t be any guessing when it comes to your money.
Did I mention that we love EveryDollar?
Step 2 – Know Your Income
Make sure you look at your bank statements or checks/check stubs from work to see exactly how much you make monthly.
You need to know exactly what is coming in each month so you can plan everything out.
It is not as simple as well, I make $40,000 a year so $40,000 / 12 = $3,333.33 per month.
There are pay frequencies involved, taxes, possibly health insurance and other things that may be taken out of your paycheck that reduce your net monthly take-home pay.
It is crucial for your budget to know the actual amount that is coming in each month.
*Side note – If you have an irregular income, I talk more in-depth on this on my blog post How To Budget on an Irregular Income, but here is my quick advice for you, budget monthly what you know you’ll make. Look at the past 6 months, and what was the average? What was the lowest month? Then, go with the lowest month of income, and budget that(if your low was $0, go to the blog post I mentioned a couple sentences ago). Then, when more money comes in, it is extra money and you can adjust your budget, instead of having to start cutting categories if you don’t make as much as you thought you would. Pick a conservative number that will get you started on your monthly budget.
For the sake of this example, I will refer to the budget as pen and paper. As I mentioned above, you may choose to use a method that uses technology, or something else, but for now and this “how to budget” post, we will use the pen and paper analogy to simply understand the concept.
Now that you know your income, put that amount at the top of the paper. If it is $2,000 monthly, put $2,000 at the top of the paper.
You have just completed the most important part of the budget!
Now, it’s time to spend it.
Step 3 – Write Down All of Your Expenses
The key to a budget is to spend your money on paper (or app/computer) before you actually spend your money in real life.
The reason for this is to proactively decide what will happen to our money before anything ever happens. The way we do this is by writing everything down that we know for sure we will spend, and adding in some things that we might spend.
For example, you have expenses that will happen no matter what, such as, rent, groceries, cable, subscription payments, cell phone bill, credit card minimum payments, etc.
Write Everything Down
What we need to do in this part of the budgeting process is spend all of the income that you placed at the top of your paper. It is important that you write everything down that you can possibly think of. You could even refer back to your bank statements to see how much those automatic payments to different companies may be.
Do Your Math
Once you write everything down and how much money each thing is, you need to start doing some math.
For example with our $2,000 income as mentioned above it may look like this:
Cell Phone $55
Cable & Wifi $80
Car Payment $200
Car Insurance $80
Credit Card Minimum Payment $35
Entertainment & Fun $45
Spending Money $20
Gym Membership $30
Other Insurances $59
Total of these expenses – $1,440
Now we take the $2,000 income, and minus the $1440 and that leaves us with $560.
$2,000 – $1,440 = $560
We have $560 left to continue spending on paper, or to put towards our current goal.
Are You Over Spending or Underspending?
When you add up all of your expenses, is it more or less than your income?
This is an important question that you need to know the answer to!
If your expenses are more than your income, you may have to go and cut some categories back to make up the difference. Don’t be discouraged if this is your situation.
What To Do If You’re Over On Your Budget
If you are currently overspending and the budget shows you that, then consider it a good thing that you know now exactly what is going on in your personal finances. Allow the budgeting process to help you fix that, and get you going on the right track. If you need to cut expenses, try cutting a little bit from many different categories, like reducing restaurants and eating out, as well as entertainment and other non-essentials. Reducing multiple categories by a little bit can be easier to handle than trying to cut something like restaurants out completely.
What To Do If You Are Under Your Budget
If you are budgeting and you have some money left over, you may be wondering,
“What do I do with this extra money that is in my budget?”
If you have put your income at the top of the paper, all of your expenses are written out, and you still have some left over money I would suggest a few things.
The first is to make sure you budgeted a little bit of fun spending money. This will give you some freedom and keep you from feeling like your budget is restricting you. It doesn’t have to be a lot, but a little money to spend on whatever you want is always nice.
Secondly, I would say focus your efforts on your goals. If you have leftover money and you’re trying to build up your emergency fund, use it for that! If you’re working on paying off debt, throw that extra money towards the debt. Whatever your goal is, that is a great place to put that remaining money in your budget.
Step 4 – Track Your Progress
It is absolutely crucial to track your progress throughout the month. Not tracking your budget is like saying you will count your calories, but never write down what you eat! You have to track as you go.
Make Tracking a Habit
My wife and I got into the habit ourselves that every time we paid for something, we automatically open up our app and put in the amount we spent into the proper category.
You can find what works best for you, I know some people that go through everything once a week (I can’t do this because my memory fails me, and I forget what everything was for).
I recommend as often as possible… if you swipe your card, track your transaction on your envelopes, your app, or your excel spreadsheet, whatever you are using just make sure it is tracking!
The purpose of tracking is to know exactly where you are at, at all times.
For instance, you planned out $400 in groceries for the month and you have been to the grocery store two times. Each time you spent about $120. Since you tracked it and put it into your budgeting method, you know that for the rest of the month, you have $160 to spend on groceries. If we had not tracked those purchases, we would be guessing about how much we spent previously, and hoping that we come in under budget. Tracking is an essential part of the budgeting process that keeps you on in-the-know at all times.
Take Time To Reflect on the Past Month
At the end of the month, you should see how close you were to your actual budget. Did you go over in certain areas? Did you spend less in other categories? Be sure to take some time to review and reflect on the previous month.
This reflection will help you moving forward to know how to plan better, and really optimize your budget for future months and your life!
Step 5 – Don’t Give Up!
Keep going! Don’t give up on your budget if it isn’t perfect the first time. It takes some getting used to, you have to find your flow. Give yourself at the very least between 2 and 3 months to start getting used to it. The biggest mistake with budgeting that you could make would be to give up after 1 month or 2 months of trying it!
Once you find that flow, your life will be changed.
You are going to love the peace, control & overall confidence the budget gives you. What’s better than knowing exactly what is going on with your money?!
If this is your first time creating a budget, what was your favorite part? What was your least favorite part? If you’ve been doing a budget for a while, and just wanted a refresher, what do you love most about budgeting? Let me know in the comments!