Budgeting Basics

Table of Contents

How to Make a Healthy Budget

If you’ve ever logged onto your bank account and found a shockingly low number awaiting you, you know how easy overspending can be. The signs that you may need to rethink what your spending may be as obvious as an overdraft – or they may be subtle, like struggling to fulfill your long-term financial goals.

Building and maintaining a budget is the key to attuning your finances to your goals. By sticking to a well-planned budget, you are guaranteed to meet your financial goals – whether those are reducing student loans, paying down a mortgage, or building up retirement savings. Moreover, with a healthy budget, you reduce the change of unwanted surprises in your account balances at the end of the month.

Spending Tracker Workflow

Maintaining a healthy budget, however, often comes with the same problems as sticking with a healthy diet: we have a hard time saying, “no” to what we want, and what we want may not be good for us. Your ideal budget requires a bit of nuance and a lot of customization – and ultimately, it must be achievable.

Why Do You Need A Budget?

Creating a budget will help you in a variety of ways. As you complete the following exercises, you’re likely to:

  • Identify inflated spending categories where you can easily save money: That $8 oat milk latte is delicious, but it sure does add up! Introducing: your office coffeemaker and $4 carton of oat milk. Being your own barista is an easy way to save upwards of $1,000 a year.
  • Bring your spending in line with your values: Now that you’ve saved that cash, you can redirect it towards actions in line with your morals, like buying organic or giving to charity.
  • Realize an achievable path towards accomplishing your long-term financial goals: By breaking down your 5-year goal into monthly micro-goals, you’re far more likely to maintain the endurance needed to get to that goal’s finish line. What sounds easier – miraculously saving up $100,000, or putting away $1,700 per month for five years?

How to Make the Budget Happen?

Step 1: Assess your Resources

Start your budget plan by calculating your gross income: the amount of money you bring in each month after taxes. Subtract your automatic deductions (e.g. 401(k) or 403(b)).

Step 2: Assess your Expenditures

Next, list out your expenses. Print out your past few months of credit card and bank statements for reference. An Excel sheet can be your best friend here. As you complete this step, aim for accuracy and honesty. Another way of doing this is subscribing to Tiller and link up your credit card and banking accounts. Set-it up using their 3-step process.

Step 3: Categorize your Expenses

Once you have a list of your past few months of expenses, categorize those bills into broad categories like groceries, utilities, transportation, housing, insurance, travel, and entertainment. Make sure each category is specific and mutually exclusive, meaning that each expense has a clear category that you’ll be able to remember in the future. Depending on how many months back you’ve tracked your spending, calculate your monthly average for each category.

Now that you have your budget categories established, separate these into two groups: needs (living expenses) and wants (lifestyle expenses). Your “needs” include basic groceries, housing, utilities, transportation, insurance payments, and minimum loan payments – the expenses that must be covered each month. In contrast, your “wants” include travel, gym memberships, entertainment, eating out, and non-essential groceries; you can think of these as “discretionary” expenses.

As you distinguish between your wants and your needs, it may be helpful to put numbers aside. You shouldn’t be judging your past spending habits at this point, but rather setting up honest expectations to build an accurate budget.

Step 4: Set Some Goals

You’ve calculated your income, you’ve assessed your monthly expenses; now, it’s time for the fun part – let’s set some goals! During this step, you should identify your most important financial goals; these may include building an emergency fund, paying down debts or loans, saving for a down payment, saving for a child’s college, or even saving for a vacation. Make sure to consider both short-term and long-term goals. Additionally, make sure that these goals are SMART: specific, measurable, attainable, relevant, and timed. Write down your goals in a notebook, in a note on your phone, or in your budgeting app.

Step 5: Determine your Budget Format

Next up, determine which type of budget you’d like to set. There are two main types: the zero-based budget and the goal-based budget.

The zero-based budget format, popularized by financial influencer Dave Ramsey, prompts you to match your income to match your outflow. In other words, you assign a purpose to every dollar you bring in. For example, if your gross monthly income is $3,000, your combined expenses and savings that month will equal $3,000 precisely. Although this type of budget is a great way to ensure that you’re living within your means, some people find it too restrictive and difficult to follow.

If you’re in that group, the goal-based budget might be a better match. This budget form works backwards but setting your savings goal first, then making sure your allocation towards your needs is satisfied. Finally, the remainder is set aside for your wants. This format is looser and more flexible than the zero-based budget, and it may feel more achievable for some.

Step 6: Get to Work!

Now that you have a sense of your overall cash flow, as well as your ideal budget model, it’s time to dive into the details.

If you’ve elected to build a zero-based budget, start matching up your income to your outflow. Take your list of goals, break down the total number into your desired monthly savings, and make sure to factor in that monthly micro-savings goal.

If you’re aiming for a goal-based budget, take a close look at your past sums for each expense category. Do these fit into the goal-based budget figures? If not, you may need to consider re-modeling your spending habits in the future.

Step 7: Make it Happen

Once you have your monthly budgetary categorized identified and calculated, figure out how best you can execute your budget.

An oldie-but-goodie method is the envelope system, where you put a certain amount of money for each category in an envelope for the month. This system can be especially useful for variable expenses, as it forces you to stick to your budget even when temptation calls.

Nonetheless, the envelope system can feel a bit antiquated in the age of digital transactions. If you tend towards purchasing with a credit or debit card, an Excel sheet could be your best budget tool. There are a variety of free budget templates for Excel available online, and these are a great way to track your spending over the course of a month. Just remember, the data in this sheet is only as accurate as what you type in.

If you think you might have a hard time remembering to type in your expense, you might be better suited to spending tracking apps like Tiller, YNAP, and PocketGuard. Make sure to match your app to your budgetary format to maximize your success.

Step 8: Keep Going!

Looking forward, you should schedule budget check-ins on a biweekly or monthly basis to keep yourself accountable. As you prepare your budget for each month, take a look at the calendar to see if you have any irregular expenses coming up, and make sure to account for those in your budget.

Tips & Tricks

Now that you’ve taken the time to build a customized, personal budget, the last thing you want is to be foiled by a simple mistake. Here are a few tips for staying on track:

(A) Set realistic expectations!

If you exceed your budgets for each spending category on a monthly basis, remember that your budget is a living, flexible document that can – and should – be adjusted to allow you to succeed! Your plan needs to work for you. Analyzing where your money goes is critical, but you should also be thinking about why and how you make your purchasing decisions.

If you know your spending patterns, you can create a strategy to manage those small purchases that tend to add up to big costs. For example, you could designate a day during the week where you allow yourself to go all out on your favorite coffee drink. Knowing that drink is coming on Thursday makes it easier to skip the coffee shop on Wednesday. If you know Friday night is when you get together with friends for dinner, you may find it easier to cook at home during the week.

Think of the ideal approach as limiting, not restricting. Overly restrictive budgets will inevitably go the way of a crash diet. Saying no to everything isn’t realistic. Something will always happen that will force you off track.

A budget that limits the small purchases and expenditures gives you wiggle room to participate in the activities that make you happy. Plus, if you turn your favorite purchases into occasional special treats, they are more likely to feel like rewards.

(B) Account for variable expenses

It can help to look at your income and expenses across several months to account for any fluctuations. For example, if you have an incentive compensation structure where you receive performance-based bonuses, it is important that your budget not operate under the assumption that every month you will be bring in the same bonus. Utilities costs will also vary season to season. Gas bills may be under $100 in July, but over $300 in February. If you only allot $100 for your gas bill in your budget, you may encounter issues during the winter.

(C) Expect the unexpected

Some people like to build in an expense “slush fund”, a category that can include all of the unpredictable miscellaneous expenses in a month. Depending on the size of your savings, you may want to adjust the size of that slush fund – if you have large savings, you can operate on a hairline budget and know that if your expenses exceed your income for the month, your savings will compensate. Similarly, if you’re still building up your savings, it would be wise to ensure that your budget allows for a significant amount of wiggle room should your income decrease or your expenses increase unexpectedly; in these cases, a general rule of thumb is to leave a margin of half a paycheck. Trips to the urgent care or sudden appliance repairs are a fact of life for all of us, and your budget must prepare you to deal with life’s expectedly unexpected events.

(D) Keep Your Budget Dynamic

Budget inputs such as your job and living arrangement are bound to change over time. Be sure to keep updating your financial plan to account for the big updates as well as the small. Your plan should evolve as you do, so check in every few months on your progress. Is the budget accomplishing what you wanted it to do? Can you limit some of your favorite small purchase items even more?

Final Thoughts

Planning out a budget may not be the most exciting thing you do today, but its impact on your financial future is difficult to underestimate. It may help to review what you are doing with someone who has some financial experience as well. 

Feel free to set-up a meeting with me. Share with us your goals, and our team will help you fine-tune your approach to reach those objectives.

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