Five Steps to Make Your Budget Work for You
What is a budget and how can it help you? Where do you start to create your own budget? In this post, I discuss what a budget is and the purpose behind budgeting. I outline the steps to creating your first budget, and what to do if you run into issues.
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Ah, the budget. What a scary word to some. Many people believe that a budget is restrictive, demanding, and hard to follow. I’m here to tell you it’s not.
Before getting married, my mom told me I had to be able to provide for myself financially, which meant that I needed to make a budget, estimate my expenses, and calculate how much income I would need to survive. This is a bit backwards from the way most people do it, as I’m sure most of you already have a job and have been paying expenses for a while.
That’s a good thing. Knowing what your expenses and income are takes the guess work out of making a budget. You can make your budget work for you.
Often, the budget is seen as a punitive thing. It’s restrictive. “I have to stay in budget this week so I can’t do xyz.” …This should not be the case!
Your budget should reflect YOUR priorities and give you ULTIMATE choice and control over YOUR money.
The purpose of a budget is to help you make intentional choices to control where your money is going each day, month, and year. You are in the driver’s seat, not your reckless spending habits, or your school debt, or your employer.
When you create a budget, you are analyzing your income and expenses, and organizing them in a way that you can both meet your basic needs, but also work toward your financial goals. So yes, you can spend $10 on a fancy coffee one morning if you want to, but that might mean that you have to put $10 less toward the vacation that you’re taking in December… or food this month.
Five Steps to Create Your Budget
To make your budget work for you, it must be created with specific intention. The basic income minus expenses calculation is important, but so are your goals, mindfulness, and planning.
1. Know Your Income
The first step in creating your budget and making your money work for you is to know your income. When my husband and I were considering getting married, both of us were in college and neither of us had jobs, so estimating our projected joined incomes was quite the challenge.
However, if you’re working or have some sort of income, you won’t have to estimate. Just take a quick look at your bank statements or pay stub. If you get paid the same amount every pay period, great. Go ahead and place that number at the top. If you are classified as an hourly worker, or earn a different amount each pay period, take the average of the past three months to use as your estimate.
I like to know my income for each month, since this is the frequency of most of my bills. You could also consider your income every two weeks if that works better for you. I wouldn’t recommend any more or less than these two rates though.
Once you have your average income for this month written down, move on to the next step.
2. Track Your Expenses
Tracking your expenses is important, but might be somewhat tedious the first time around. It’s important that you write down every single purchase. If you don’t, you might over estimate or under estimate how much money you need for each category each month.
Once you have a list of all of your purchases, you’ll need to organize them. Some common categories that many people use when creating a budget are:
You would also want to consider other things such as insurance, or any debts you have. It’s not so important how you organize your expenses, only that the organization makes sense to you. For example, my husband and I categorize our insurances separate from normal monthly expenses because we pay renters and auto insurance on a yearly basis. It wouldn’t make sense for us to put renter’s insurance under housing or auto insurance under transportation. But that might make sense for you.
Once you have your expenses listed and organized, subtract the sum of your expenses from the sum of your income to find out if you are spending the right amount of money. There are a couple of ways to do this step. You could use a pencil and a piece of paper, but this might make this step even more tedious. Personally, I use a variety of tools to chart my budget each month.
Related: If your expenses are more than your income, check out my recent post How to Cultivate the Debt free Mindset
In the past, I’ve used Mint to automate my budgeting. I set up my bank account and automated the labeling of my expenses, but found that the automation feature removed my mindful attitude about budgeting and, as a result, I ended up not following my budget. However, Mint has a lot of features that other services just don’t have, beyond that of budgeting, that you might appreciate.
I’ve found that EveryDollar from Ramsey Solutions provides the same service with a more streamlined user experience. This is the program I use for monthly budgeting, and have used for over two years.
While EveryDollar offers automation with their paid version, I actually appreciate the free version without automation more. When you automatically categorize your purchases, you don’t know where they are going. Keeping things manual helps me to be mindful of my spending and saving, and know where every dollar is going.
The Excel Document
For the even more manual version, you could always create your own Excel Document. While this does require some moderate experience in Excel, at the baseline, you can input your income, subtract your expenses, and chart each of these over the course of the year.
I use an excel document to track my budget over longer periods of time. Each month, I copy my EveryDollar budget into my Excel document so that I can see gains and losses over the past few months and years.
Check out this article for more information on how to set up your Excel spreadsheet budget.
3. Consider Your Goals
After you’ve tracked all of your expenses and categorized appropriately, you need to consider your short- and long- term financial goals. In the short term, you’ll want to make sure your basic living expenses are covered. In the long-term, you might want to save for a specific item or experience.
For this month, if your budget calculation (income – expenses) does not equal zero, you need to re-allot your money. Consider if you might could shave a few dollars off of your electric bill by altering the temperature by two degrees, that way you’re able to buy organic fruit at the grocery store, or whatever else you want.
The choice is YOURS.
You decide what your priorities are (after basic needs are addressed) and you get to decide what to spend your money on. Be intentional about your priorities so that you can take baby steps this month to meet next month’s goals.
4. Be Flexible
Throughout the month, you might find that your projected budget doesn’t match up with the one you created at the beginning of the month. That’s okay.
We just need to readjust. Flexibility in mindset is key.
Maybe you earned more or less money than you thought. Reallot your money to address the changes you made and learn from the experience.
Maybe you spent too much on groceries because you didn’t bring a list. Note the change, and choose differently next time.
Maybe you received a bonus from work, but don’t know what to do with it. Be intentional with your money and create a long-term goal such as paying off debt as fast as possible, creating an emergency fund, or starting school again.
5. Plan for Next Month
After you’ve accounted for all of your expenses this month, plan for the next. Just as you needed to readjust your budget this month, you will need to plan for similar changes the following month. Take into account if your pay frequency changes (some months have three pay days) or if your bills might go up due to changes in the weather.
As you account for these monthly changes, you’ll be able to identify your needs better over the course of the year. For example, I know that my electric bill increases around November, so I’ll need to account for this between October and November’s budgets. Expect that there will be fluctuations in your budget, but plan for the changes that you can control.
Like what you see?
A budget can be a powerful tool if used for your own benefit. You can make your budget work for you by knowing what your income and expenses are, considering your short- and long-term goals, maintaining a flexible mindset, and planning for the future. Stop giving away your money without knowing where it’s going and start your budget today.
Have you started your budget yet? Let me know in the comments below what your biggest challenges have been in budgeting and making your money work for you.
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Lat Updated: October 1, 2020
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