Budgets are one of the most hated, most loved, most over used tool in the personal finance world. And today, you get my spin on how to build a budget that works for you!
Because honestly, I believe that budgets don’t have to suck. They don’t have to be limiting, and they don’t have to stomp the fun out of life.
I know what you’re thinking. “I don’t have time (or energy, or desire) to keep up with my spending every day.”
Trust me, I get it. I don’t have the time, energy or desire to track my spending either. The reality is you have to keep track of your income and expenses. But it doesn’t have to be so complicated or time consuming.
So let’s start with setting a budget, and I’ll walk you through my process to create the simplest budget ever. I suggest you print out my monthly budget worksheet. Use it as a template to design your budget today, then print another copy if your financial situation changes and you need to re-work the expenses.
There are two things, a budget has to be: Realistic and Functional. Let’s start by making our budget Realistic.
A Realistic Budget Balances
That means you’ll need to understand your total income, and your total expenses. You may know that the basic concept of budgeting is that
Income = Expenses
Income is the money you bring in every month. For people on salary, this is super easy: it’s the same amount, every month. If you’re hourly, you may have some variation from month to month. It gets more complicated if you’re an independent contractor, have 2 jobs, or side hustles.
You should never include money that isn’t guaranteed or fairly constant like bonuses, or annual raises. I’ve seen too many people get burned by making decisions based on money they haven’t earned yet.
On the budget tracker, list each income source and the average monthly income amount.
Expenses get more complicated. Every moment in your life requires money. Sorry about it, but you require food in your belly, shelter over your head, clothing so you don’t wind up in jail… you get the point.
Do you really know how much you spend each month? This doesn’t necessarily mean money you’re actually spending today, you may save money that you’re going to spend in the future, too.
I consider savings an expense because you will spend that money at a later time. For example, I may not have $1,000 extra to spend on vacation in any one month, but if I “spend” $100 on travel, and put it in a savings account, then I can cover the expense when I’m ready to purchase the trip.
On the budget tracker, you’ll see I have broken out “Fixed” expenses and “Variable” expenses. Fixed expenses are the things that cost about the same amount each month (including savings). Variable expenses are the kind that are more flexible. Basically, you’re not going to get a monthly bill.
Here is the secret to not spending hours on you budget! Skip variable expenses, for now. Write down your Income, and your Fixed Expenses. Then skip to the bottom of the budget tracker and do the math:
Income – Fixed Expenses = Variable Expenses
If you subtract your monthly bills from your fixed expense you get how much you have to spend on the variable stuff.
Try it! How did it turn out? There are three outcomes and three answers. The outcomes are: Income minus fixed expenses is negative, your income minus your fixed expenses equals zero, your income minus your fixed expenses is positive.
Work the Budget until it Balances
I want to point out that I’m labeling your monthly bills fixed expenses because they are constant today, but that doesn’t mean that they are constant forever.
With a little bit of work, you can cancel memberships and monthly subscriptions, spend less on your living arrangements by moving, optimize your car insurance, etc.
How much do you have left to spend on variable expenses? You may realize now that you need to spend some serious time working on your fixed expenses so that you have money left over for variable.
Next you will want to think about divvying up your variable expenses so that you know exactly how many times you can go out to eat, fill up your tank with gas, etc.
One nice thing about variable expenses is that once you have the fixed expenses covered, you can allocate variable however makes you happiest. Do you love to eat at restaurants more than go on vacation? Do you want to go to concerts more than you want to redecorate your living room?
With Variable Expenses, you can do whatever your heart desires, as long as you’re not spending more than Income minus Fixed Expenses. Give and take from each bucket, as long as you’re being realistic about your priorities. Do you need $100 for gas, or can you trade cars with your spouse and save $25 for travelling?
One trade off that’s very common is cooking at home versus eating at restaurants. Did you know that in the last decade, Americans started spending more at restaurants than they did on groceries? It’s totally fine if your budget still balances, but trading a few restaurant meals for cooking at home may be the key to balancing your budget.
Once you’ve determined about how much to spend on each budget item, it’s time to put this budget to work.
A Functional Budget is Easy to Track.
A budget doesn’t do you a whole lot of good if you don’t implement it. And implementing a budget means tracking. So we need to figure out a way to track this without going overboard.
I highly recommend using an app to track your budget. There are several out there, but my favorite is Personal Capital. Personal Capital links to your bank accounts, credit cards and investment accounts to help you track where your money is coming and going. In the app, you can set up a budget and track how much you have spent each month. Click this link to sign up for a FREE Personal Capital account.
I spend less than 5 minutes each week reviewing my expenses on Personal Capital. First, I check to make sure I recognize every transaction. Then, I confirm each expense is grouped into the correct budget category.
Last, I make sure that no category is getting close to being maxed out. If it is, I evaluate my spending and see if it is a temporary issue, or if I need to change my budget for the long term. For a temporary issue, I simply find somewhere I can spend less to make my budget balance this month. If it’s long term, I pull out my budget worksheet and rework the categories.
Did you download the worksheet, build a budget, and set up tracking with Personal Capital? Let me know how you're doing in the comments!
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