3 min read
I know what you’re thinking, budget is that scary word that makes you feel like you have to restrict your spending - false. Budget simply means a plan for where your money goes and how you allocate it. Having a budget means really understanding where your money is going and how you are dividing it up to cover your needs as well as having some wiggle room for spending.
Let’s define budget a little more
In order to set ourselves up for success in the best way, it will help to have a better understanding of a budget and what goes into it. As I mentioned above, a budget is not intended to be a restriction on your spending, instead it’s meant to be a plan or formula that allows you to compartmentalize where your money is going and how much you have left to spend. There are a few terms that will help when talking about budget:
- Expenses: these are bills such as the car payment, insurance, medical bills, that we pay on a monthly basis. However, expenses are also groceries, the internet bill, utility bills, gas for the car and the phone bill. They are things that we need to pay for as part of our daily routines.
- Net income: as an individual, net income is our paycheck amount after deductions and taxes come out. It’s the amount of money that actually makes it into your bank account on payday. If you’re talking about net income in terms of business budgets, that is the amount the business has left after wages, taxes, expenses, and cost of goods sold.
- Financial goals: these are the goals you set for yourself when it comes to how much you want to save, where you want to invest, or possibly what category you want less spending money or more spending money.
- Fixed expenses: these are the expenses that stay the same every month. Your car payment, rent, or mortgage. These are the expenses you can count on being the same every month, which can help when you’re creating a plan.
Now that the term budget is more easily understood, we can look at the “formula” for creating a budget.
The budget formula
There are five aspects of a budget formula that will help you figure out what money you’re getting, how it will be distributed, and how much you have left over. In order to accurately calculate your budget you need to know your net income and your expenses, but it doesn’t end there - you need to then track your expenses throughout the month to make sure you’re sticking to your plan. Again, we don’t want to view a budget as being restrictive, it’s simply a plan that allows you to put money where it needs to go.
List your income
You can’t make a budget without knowing how much you’re making, so the first step is to list out all the avenues you can make money in a month. If you live with a spouse or another person you combine money with for bills, you’ll want to list theirs out as well.
1st paycheck: $1,500
2nd paycheck: $1,500
Side hustle: $3,000
Total income: $6,000
Below would be an example of listing out income when you get a paycheck every week instead of bi-weekly.
1st paycheck: $850
2nd paycheck: $850
3rd paycheck: $850
4th paycheck: $850
Total income: $3,400
Once you have this done for everyone in your household or those that contribute to bills, you’ll be able to get started on listing out your expenses. Sometimes, depending on the job you have, your income may be more irregular than a bi-weekly or weekly paycheck, you’ll want to look over your income over the previous few months and take the lowest income made to start out your budget with - this will help you underestimate rather than overestimate.
List your expenses
The expenses section can be a bit tricky, but a good rule of thumb is to make sure you’re listing out your recurring expenses that you pay on every month and covering the basic needs such as home, utilities, food and transportation. Some common expenses include:
→ Car insurance
→ Car payment
→ Gas bill
→ Water bill
And when you’re writing these down it’s important to keep in mind that these are monthly expenses meaning you’re paying for these every single month with no breaks in between. For example, you want to avoid listing out things like oil changes, tires, etc. in your transportation monthly expenses. These will fit better in the category of miscellaneous expenses.
After you list out these expenses, go through and list all other spending categories like debt, childcare, personal spending and money you use for fun such as activities and clothing. Once you have all that listed out it’s time to subtract the expenses from income in order to visualize what you have left.
Subtracting expenses from income
When doing this equation, you’ll want to focus on the zero-balance budget method, which simply put is giving every dollar you have coming in, a job to do, whether that job is insurance, gas, bills, fun money, etc. It has a job and you are aware of that job.
Income - expenses = money to allocate other places
The important part is to not let the money leftover after expenses are subtracted to just sit there - you want that money to have a job too. This is important because in order to create a budget that works and actually build wealth, you need to have a job for all your money.
When doing this equation, there are a few different outcomes, you have money leftover, you have a $0 balance or if you have a negative balance. If you have a negative balance or if you break even after subtracting expenses, you’ll need to find a way to cut expenses or bring in additional income every month. Ideally, you’ll want to have money leftover to allocate to other spending categories to ensure you’re covered. Once you’re done doing the math, you still have to keep track of your expenses to make sure you’re sticking to your plan.
Track monthly expenses & spending
So, now that you’ve allocated your funds and created a budget, you still want to keep track of your expenses and spending so that you can revise your budget next month. This allows your next budget to be more accurate and then you may be able to reallocate funds to different places come next month.
You can create a spreadsheet or use a third party app to help you track your expenses and spending so you don’t have to worry about it. That being said, it’s important to do it in the moment so you can keep an accurate log instead of waiting until later and trying to remember what you purchased and how much it was.
This part is where your discipline comes into play and it’s super helpful to keep your financial goals in mind during your tracking. It can be hard to stay motivated and disciplined when trying to stick to your plan and not overspend. So, congratulations, you made a budget for the month! Now, you gotta do it all again before the next month to keep you on track!
Setting up next month's budget
When you set up the budget for the next month, make sure to consider what you spent where last month, different spending habits, changes to your debt repayment plans, monthly income, the addition of an emergency fund, etc. I suggest doing this within the last 5 days of the month before the next month begins. Once you have this routine down, it becomes easier to sit down and do it every month and it gets easier to avoid overspending. Next thing you know you’re building your savings and have a nest egg for future plans, kids, or anything else you’re saving for - AND you achieve financial goals.
It’s important to stay confident and consistent when setting up and sticking to your budget. It can be hard to stay on track, but once you start meeting your financial goals and seeing that savings stack up, the discipline and consistency gets easier.
Setting up a budget is important in order to create a nest egg for yourself or your family and reach your financial goals. Remember, a budget is not meant to be restrictive, but instead it is a monthly plan that allows you to allocate your funds correctly. When creating your budget you need to keep in mind your expenses, especially the fixed ones, which stay the same month after month. In the realm of expenses, make sure to cover the four basics - transportation, home, utilities, and food. Make sure to keep track of your spending throughout the month and revisit your budget before the start of the next one, to keep everything accurate and actually help you save. Making a budget doesn’t have to be complex, it can be simple and straightforward, but the discipline and the consistency is what takes practice.