Are there months when you wonder where your paycheck keeps disappearing? Here I break down everything you need, to make a budget that is going to work for YOU.
Why should you have a budget?
Do you have a money goal in mind? Something like taking a big vacation, save for a down payment, or pay off the never-ending student loans? Learning how to make a budget is a great way to start building towards one or multiple goals!
To begin, let’s create a plan to help you take control of your money. It’s hard to set money goals when you don’t know where your money goes each month. As you work through the process you will become more conscious of your money habits and discover areas of improvement.
Step 1: Understand your Budget
1. Find a Budget Template spreadsheet you like.
If you search “budget” online there are millions to choose from. The key to success is finding a template good for you and not someone else. When I first started, it was a pen, paper, and calculator.
Over the years I now prefer a spreadsheet on the computer to easily update or make adjustments. I have several free templates for you to try out. I’m happy to share via email, simply click here. Include “budget templates” in the subject line.
You can also create one on excel or try a budgeting app. Many clients prefer the apps such as Mint, You Need a Budget, or EveryDollar. It is important to make your budget template personal so it works best for you! The more personal it is the more it will benefit you.
2. One Simple Formula – The Zero-based Budget
Budgeting comes down to one simple formula.
Income – Savings – Expenses = $0
Looking at the above formula some think “I don’t have any money”. It really means we will be accounting for every single dollar, known as having a Zero-Based budget. If your budget does not equal zero, the extra should be immediately put into savings. However, if you’re left with a negative number, you are spending too much! This is where you can begin making adjustments.
Step 2: Setting up your Budget: Create a Budget to Work for You
A budget or spending plan is made of three separate sections.
1. Income
Your income is all the money you make AFTER taxes. Meaning all the money that hits your bank account. You want to make sure you’re including all sources of income here, not just the 9 to 5.
Income Category Examples:
- Paycheck
- Bonuses
- Tax Refund
- Side Hustle(s)
- Investments or Social Security
- Gifts
2. Savings
Savings should account for everything you are currently saving for.
Savings Category Examples:
- Emergency Fund
- Roth IRA
- Retirement Account
- Investment Account
- Extended Travel
- Down Payment
Note: If you’re lucky enough to have a 401(k) with your employer, because that money is removed from your paycheck before you receive it, you don’t want to account for that in this budget. Remember, it’s your take-home pay.
3. Expenses
Expenses will be broken down a bit further. Not all our expenses are bad, and a lot are unavoidable.
Is it Essential?
Under necessity are expenses you can’t really get rid of. This is where you need to think about what is important to you, and what you consider essential.
The examples below DO NOT include items such as restaurants, monthly subscriptions such as Amazon or iTunes. These items are not essential, they are a luxury.
Necessity Expenses Category Examples:
- Rent / Mortgage
- Utilities
- Health Insurance
- Vision or Dental yearly out of pocket exams
- Cell Phone Bill
- Groceries
- Hygiene (toilet paper, tissues, toothpaste)
- Beauty (shampoo, conditioner, soap, face wash)
- Gas
- Car Insurance
- Car Maintenance (registrations, oil change, etc)
Luxury
Luxury takes account of all your other expenses. Luxury expenses are the things that you enjoy in life but aren’t needed. Things like going out to eat with friends, going to a concert, buying clothing because you want more.
Luxury Expenses Category Examples:
- Travel Fund (save for this after your emergency fund)
- Eating Out
- Entertainment
- Clothing
- Gifts
- Decor for your home
Note: I recommend keeping your travel savings account separate from your other savings because most likely you will spend this money in the short term (less than 6 months).
Categories for your expenses will differ from person to person. Yours will be different from mine and so on. The secret is determining the categories YOU need.
Step 3: All About the Numbers
How Much do YOU Spend
Now the fun part. Each category that you’ve created needs to be assigned a dollar value.
This means you have to figure out how much you spend for every category you’ve listed. Some of these may be easier than others to calculate, for example, you know how much the rent or mortgage is, that’s an easy calculation, but utilities could vary month to month depending on the weather. I like to look at the previous month and depending on the time of the year I will stay the same, go up or down a bit. July it may be $95 (I’m in a townhome) so August will be the same or perhaps a little higher depending on whether it’s a heatwave or the rainy season like we’re in currently.
Spend some time figuring out how much you spend per month on each category.
Budget Tips:
- If you want to be more accurate when calculating your variable expenses, pull up your most recent credit card statement and look at how much you’ve been spending the last few months.
- It’s ok to not get this number 100% correct! I repeat….It’s completely ok!! Budgets are living documents with adjustments and tweaks as learn about your spending. Especially the first 3 months if this is your first time. Don’t overthink and get all stuck in the details. It will come together, I promise you!
What the numbers mean
At this stage, you should have all of your categories created and have filled out how much you spend/save per month per category.
Does your budget equal zero?
If yes: Wow, good job! I’m impressed, what did you do to make it zero? It typically never equals zero at first. It took me several attempts and months.
If no:
Is it negative or short?
If your Net number at the end is negative, this means you are spending more than you are bringing in. Not what you wanted to hear me say, was it? Take a look at your categories and begin trimming where you can cut back. Remember most of these are temporary and as your income increases or debt decreases you can make new choices at that time.
Remember, we don’t want more debt, we want less so we can save more!
Tracking your expenses will help you get better at figuring out where you can trim, so if you’re a bit lost right now, that’s ok! You’ll be able to notice your unnecessary spending habits soon!
Is it positive?
Yay!! Congratulations you have extra cash to save.
Do not add this to one of your expense accounts! Throw it all into savings provided you have accounted for all your necessary bills.
Step 4: Keep Track of Your Expenses
This is arguably the MOST IMPORTANT PART of budgeting. So yes, you need to write down every. Single. Thing. You spend money on.
It might seem difficult (the first couple of months) and annoying to do this (and it can be) but keeping track of your expenses is going to be eye-opening. This is where you will get to see where your money is actually going.
Budget Tips
- Update Consistently: I like to update all my expenses every week. Doing this consistently will help make it a habit. Once you have it figured out you really only spend 10-15 minutes looking and making minor adjustments. If you eventually become a crazy budget lover like me, you’ll even enjoy this (queue mental image of me pouring a glass of wine to work on my budget all Friday night). Yep, I’ve been known to do this with a nice glass of Pinot Noir!
If you can commit to this for three months, the insight you’ll gain on your spending will be worth the annoyance of writing all this down.
Step 5: Make Adjustments
It is completely normal and recommended to tweak your budget!
If you are a beginner at budgeting, it is completely understandable to have your budget be way off from your actual expenses. The point of making a budget is to understand your own relationship with money and establish attainable goals.
After you’ve tracked your expenses for three months, come back and analyze what you’re seeing. Did you consistently overspend in one category? Perhaps you budgeted too little? Did you overspend due to circumstances out of your control such as an emergency?
Final Thoughts
Any area I work the hardest with my clients on is developing a plan that works best for you!! This budget is for YOU to take control of your finances. Know what you spend and identify your goals.
Hopefully, this post is a step forward in learning how to create your budget plan!
Want help with your budget? Send me an email or drop a comment down below!
