If you’re still wondering “why do a budget,” read our post here.
If you’re ready to add a measure of peace to your emotional and money life, read how to create a budget that puts you in control and tells your money what to do, rather than the other way around…
- GRAB PAPER AND PEN. Pull out two sheets of paper. On one, write the month and year at the top. On the other, write “Scrap Paper.” This page will be for writing several months’ worth of expenses that you’ve mined out of checkbooks and credit card statements.
- PULL YOUR INCOME OR PAY STUBS. Pull out your recent paystubs or income sources. Ask anyone what their monthly net take home pay is (their gross minus taxes and deductions) and most people cannot tell you off the top of their head. Their eyes will roll up into their forehead or off to the side as they think. I’m the same way, you probably are too. So pull out paystubs or calculate your average monthly income, after taxes. Write that number at the top of the dated sheet of paper.
- GATHER YOUR BILLS. Gather all of your bills and records in one place. This includes utility, phone and cable bills or online bill pay records, credit card statements, checkbook, online banking, student loan amounts, mortgage amount, car and homeowner’s insurance amounts. Tally up how much you spend in various categories: (a) mortgage or rent; (b) utilities; (c) phone; (d) cable; (e) gasoline; (f) groceries; (g) eating out/coffee/sodas/smoking; (h) car insurance (prorate); (i) property taxes (prorate if not impounded); (j) clothing (k) Target/WalMart/convenience runs (toiletries, cleaning supplies, etc.); (l) life insurance (m) car payment (n) student loan payments;(o) personal loan payments; (p) cleaning service (q) lawn service (r) monthly subscriptions (s) savings (t) gift fund (Christmas, showers, birthday) (u) tithing (v) beauty (w) monthly memberships (gym, yoga, pilates) (x) hobbies or travel (y) parking tickets (z) zombie apocalypse insurance. Use the Scrap Paper to track amounts from various categories. This will help you determine what to plan for the upcoming month.
- PICK BUDGET CATEGORIES. Based on the above categories, pick your own relevant categories and place them below your income on the first dated sheet of paper. Leave some blanks for items you may remember later.
- ASSIGN A SPENDING AMOUNT TO EACH CATEGORY. Fill in an amount you expect to spend to the right of the listed category. Some of the items are fixed and won’t change from month to month, some items are flexible, and based on your priorities.
- SUBTRACT EXPENSES AND SAVINGS UNTIL YOU GET TO ZERO $0. When you finish the list, total the expenses and subtract from your take home pay. If there is money left over, decide where you’ll allocate it (like savings or “blow money”). Your number at the end should be $0. If there is a negative number, you are over budget and need to reevaluate where to cut spending or how to bring in more income. If your number is negative, you’d be considered to be “running in the red,” and remember, our goal is to always be cash flow positive. Running in the red means you’re probably putting expenses on credit cards and not paying them off every month. This is a train to the Valley of Death in terms of financial well being and increases your risk of acting out of fear and suffering from inexplicable stomach pains, migraines, or a shooting pain in your butt. (Seriously, my girlfriend got a CEO job that pays $200K and said the shooting pain stopped when the money started coming in. Now she just gets headaches from being a CEO.)
- IMPLEMENT AND FOLLOW UP. Now that you’re at $0, you’re ready to have your month match your plan. Each time you pay a bill or take out cash for a particular category, write it next to that category in (partenthesis). If you have an item pop up that you didn’t plan for, have a little column off to the side that’s labeled “Out of Budget,” implying that you took the money from another category, savings, borrowing, or on a credit card—and it may have to be included as a line item for next month.
Remember, this doesn’t work out the first month usually. You may have thought you could cut way back on groceries but your estimate was unrealistic. Or you forgot about a major expense. Or your tire needs replaced. Life comes up. A framework that guides is better than no placeholder. A plan to nowhere gets you there every time. A budget usually takes 3 months to start “working.” You may even start to enjoy your budgeting time. I recommend picking at least two days a month to create and check in with your spending plan. In the beginning, once a week is even better.
For those of you that like a visual. This is based on a single person making around $50,000 per year:
NOVEMBER 2018
Net Income: $3,100
Planned (Actual)
Rent: $1,100 ($1100)
Utilities: $160 ($152)
Internet/Cable: $105 ($105)
Cell: $80 ($79)
Gas: $250 ($238)
Student loan: $320 ($320)
Car Insurance: $85 ($85 àsavings)
Renters Insurance: $20 ($20 àsavings)
Groceries: $300 ($340)
Emergency Fund: $200 ($140)
Donations: $150 ($100)
Cash Allowance/Misc: $80 ($160)
Roth IRA: $150 ($100)
Loan from parents: $100 ($100)
planned $0 left
Out of budget:
Speeding ticket: $190
Road trip hotel shared: $72
Urgent care co-pay: $54
If you tally the planned expenses on the left, and subtract from net income, the total will be zero. Her budget didn’t work out as planned, so she tweaked it to make it pretty close by borrowing from other categories.
CONSIDER
What is the benefit to borrowing from another category versus going into debt?
What is the downside from borrowing from a savings category?
HANDWRITTEN V. SPREADSHEET
I’ve been doing a handwritten monthly budget for over nine years. I’ve recently started using my own printed template, that is partially filled in, for categories that don’t change. The rest is written in by hand. The current month always sits on a clipboard in my office. We can grab at any time to skim what hasn’t been paid yet, or enter expenditures. Online spreadsheets are definitely faster, it’s just a preference. Choose one you’ll use. Keep it simple.
MASTER TIP
Assuming credit card debt isn’t an issue and you just use them for “convenience,” consider paying them off so they are at zero balance at the end of a month, prior to the start of the next. This makes accounting cleaner and you have a better chance of starting off a new month “fresh” and not being surprised by last month’s statement coming due in the middle of your current month. As you go more to a cash or ATM card basis, your budget will be cleaner and easier to track in real time. The 30 day “grace period” in credit card billing is just a pain when it comes to planning.
Our goal is to become our own financial gurus. We are the benevolent boss of our money, it’s there to serve us, protect us, keep us secure as we grow older. Let it do its job. Don’t use it to fund the fashion industry, your MAC habit, or a Coffee Bean fetish. Those items are the cherry, make sure there’s a sundae underneath. Terrible analogy, I know, but you get the point.
Until next time, let planning your money and planning your day be a foundation to your peace.
Namaste!
xo, Amanda