Create a budget in 3 easy steps - without doing tons of math
You’ve decided you need a budget. You are ready to jump in and call yourself a budgeter. Congratulations! That’s a big step toward being in control of your money.
And that, my friend, is a very good feeling.
For some, the thought of budgeting can make people cringe. Some people think budgeting is a four-letter word. If not done properly, your budget can feel overly restrictive and unobtainable. That can lead to frustration and ultimately throwing it out the window.
But, having a budget that is reasonable and works with your lifestyle can be a very freeing feeling. It can give you peace of mind. That’s what you want, right?
Creating a budget that works for you isn’t hard. In fact, you can do it in the following three easy steps:
Figure out why you want a budget
Determine how you are currently spending your money
Create a framework for your income and expenses
By following these steps, you’ll have created a basic budget. From there, you can tweak it to make it fit with your lifestyle. You’ll end up being in control of your money and feeling better about your spending.
Let’s get started…
Step one: Why do you want a budget?
I know you are excited about getting started. You’ve got your paper, pencils and calculator at the ready. But, stop.
Before you go any further, you need to ask yourself one question: Why are you creating a budget?
Answer honestly. If you don’t believe in the reason for creating a budget then you will have a hard time sticking to it. When things get tough or you deviate a little from it you’ll throw in the towel and say you can’t do it.
You can start by asking yourself what you are trying to achieve by budgeting. Are you expecting a budget to help you:
Create an emergency fund
Buy a home
Pay off debt
Save for retirement
Determine where all your money goes
Figure out why you always have more month than money
A good budget can help you do one or all of those things.
The secret to following and sticking to a budget is to be realistic but also have a great reason why. The great reason is your reason. It doesn’t matter why anyone else is creating one.
You need to believe that having a budget is going to help you achieve YOUR goals. You need to know that the reason you decided to create one is going to pull you through when you’d rather not face how you spend your money. Don’t just hope that there’s enough left in checking so that you can pay for the pizza you just ordered. Know for sure that you can cover it and feel good about ordering it. Even if you do eat too many slices and end up not feeling so good because even your sweatpants are feeling a little tight.
Having a strong reason why will help you continue with your budget month after month when the newness wears off and you are sick of it telling you what to do.
Step two: Evaluate how you are spending your money
Now that you know exactly why you want a budget, you need to know your spending habits before you can create one.
You may want to jump in with your calculator, or spreadsheet, and start figuring out how much you can spend each month. Slow down! Before you do that, you should understand your habits and how you tend to spend your money.
If you don’t look at your spending tendencies, you will have a hard time sticking to a budget that doesn’t resemble what you are doing now. Sure, you may analyze your spending and see easy ways to cut out costs. That’s great, but is it realistic? If your budget deviates too far too fast from what you’ve been doing it might not work in the long term.
Without evaluating how you generally spend your money before creating a budget you won’t have the right information to create a framework. You need to know what is going into it. It would be like trying to bake a cake before knowing if you have all of the ingredients and in the right amounts.
Ever hear the saying “a journey of 1,000 miles starts with the first step?” Well, you are starting your budgeting journey with a small first step. The key is to keep stepping and keep moving forward. Being unrealistic about what you can cut out of your budget without even looking at how you are spending is a recipe for a budget that is neglected. You will end up telling yourself that you just can’t budget and you’ll figure out a different way that makes more sense to you.
The key is being honest with yourself
So, you like clothes, lots and lots of clothes. That’s okay. Once you figure out how much you tend to spend on a monthly basis and over the year then you can include shopping as a category in your budget. The new knee-high boots will look even cuter when you know they are in your budget and you don’t have to feel any guilt over buying them.
You can decide how in-depth you want to go in looking at prior purchases. I recommend you look back at least three months. Six months is even better. Go for a full year if you are feeling really ambitious. A full year will really help capture any annual expenses. You don’t want to forget about those until all of a sudden they sneak up on you and you aren’t ready for them.
At this point, you can either write things down on paper or use a spreadsheet on the computer. The goal of this exercise is to determine where the bulk of your money goes. Create general, broad categories, like clothing, groceries, transportation, entertainment, water, electricity, and rent/mortgage and enter the month and the amount. Including the month will help you see how much you spend on that particular item in a month and if there is seasonality to your purchases. Don’t get too granular with the specific purchases because your goal is to see a trend, not an itemized shopping list.
After you’ve completed this task, take a break. Really. You might be a bit overwhelmed to realize how you’ve been spending your money. It’s okay. No matter if you spent the majority of it on gummy bears. You can make more informed choices going forward now that you know. You actually might be quite pleased with the way you’ve spent your money. If that’s the case, congratulate yourself!
Step three: Create a budget framework
Next, you need to calculate your monthly expenses. These are costs that are going to happen no matter what. If you didn’t do any shopping or buy anything during the month, how much would leave your bank account?
These are your monthly expenses. Think things like:
Rent/mortgage
Utilities
Phone
Internet
Subscriptions to streaming services/cable
Minimum payments on loans/credit cards
Home insurance/tenant insurance
After you listed the necessities - the things that are going to happen no matter what - make a list of items that happen, or could happen, during the year. These are still necessities but they don’t hit your bank account each month. They are thought of as “true expenses”. They could be annual bills such as car registration/insurance or property taxes. They could also be money that you need to set aside for things like car maintenance (oil changes, tires, brakes), home maintenance (hot water tank, paint, home decor), and pet costs (vet bills, shots).
The expenses in the “true expenses” category are going to happen at some point. You might not know when, but you want to be prepared. When the hot water tank ends up failing you want to be sure you’ve got the money to fix it or get a new one. Cold showers aren’t that much fun.
Right now, you just want to base the amounts for true expenses on the items you’ve actually spent money on in the last year. In the future, you’ll estimate what you need in the categories to make a realistic budget.
Now that you’ve got your spending and expenses categorized at a high level, it is time to bring in your income for a month. It doesn’t matter if you get paid monthly, bi-weekly, weekly or daily. Figure out your average income for a month based on the last six or so months. Calculate the difference between your income and all the expenses you listed.
Do you have any money left over? If not, this is where you need to start looking at what you’ve included in the expenses. Do they really meet the monthly expenses or true expenses criteria? If not, take them out of the calculation. The remaining amount after determining what you earn and the expenses you’ve incurred is the amount you can use to really create a budget that will work for you.
If you’ve completed the three steps, congratulate yourself! It can be hard to take a real, truthful look at how you spend your money. You are on your way to creating a budget you can live with.
Remember, budgeting is like dieting. Some ways work for some people and other ways work for others. It may take some tweaking for you to find the way to budget to get you the best results. But, stick with it. You will make progress even as you make changes each month and possibly each day in the beginning.
You will get closer to your why and achieving your goals. Trust the system. It really does work.
