Here's the good news: budgeting is not a complicated financial matter. A budget is simply a plan of how you will spend and save your money.
Sometimes people avoid budgets because it feels like a restriction or just stressful in general. Once you make it, you'll see that's not the case. Most financial experts recommend that you make a monthly budget, so that's the type that we will focus on in this article.
Step One: List your expected income for the month, after taxes
Step Two: List any savings and any debts you have, by account
Step Three: List the costs of your "four walls"
Utilities: lights, water, heat, wifi, etc.
Food: groceries, meal delivery kits, farmer's market. This does not include eating out.
Transportation: car payment, gasoline, parking, car maintenance costs expected that month, public transit fees, money you want to put toward Ubers, etc.
Step Four: List expected monthly bills. These are all predetermined costs.
Insurance: health, renters, car, etc.
Minimum payments: loans, credit cards (list each one out)
Gym/Fitness: monthly fees, equipment, etc.
Subscriptions: Netflix, Spotify, etc.
Laundry: coins, detergents, etc.
Childcare costs: daycare, babysitter, tips
Educational costs: books, materials, fees
Pet / Vet costs: food, grooming, accessories, medications
Yearly fees: bank account, credit card, etc.
Healthcare costs: prescriptions, supplements, co-pays, etc.
Step Five: List miscellaneous costs. You get to decide how much to spend in each area.
Home Maintenance: cleaning supplies, toilet paper, lightbulbs, etc.
Eating out: restaurants, bars, drive-thru coffee or meals, take-out
Entertainment: movies, shows, sports games, concerts
Fun: the random event that pops up, a last minute get-together, etc.
Self-care: salon, massage, manicure, barber shop, etc.
Clothing: new clothes, tailor costs, dry cleaner
Gifts: birthdays, holidays, weddings, showers, or other special occasions
Travel: train, bus, airplane + trip costs
Charity: Go-Fund Me campaigns, tithing, charities that you love
Miscellaneous: an extra cushion for any unexpected costs
Step Six: Do the math
Add up all of the money going OUT this month.
Subtract the money going OUT from your total monthly INCOME
Write down the amount of money that you have left over
Step seven: Assign any leftover money
If you have extra money at the end of your budget, assign it to the right category. The category you choose depends on your financial goals. Below you'll find a few different options:
Starter emergency fund: If you have less than $1000 saved, this should be your first priority for building wealth and financial freedom. Put all of your extra money into your emergency fund until it reaches $1000. Click here for ideas on how to save up $1000 quickly.
Paying off your debt: Once you have an emergency fund of $1000, the next focus should be paying off any debt except your mortgage. Throw any extra money at those pesky credit card bills, car payments, or student loans!
Building up a fully-funded emergency fund: Once you're debt is paid off, any extra money should go into your emergency fund. Build up the account until it has a solid three-six months of expenses. Once this is fully-funded, you'll sleep like a baby.
Increase your retirement investments to 15%: After completing your emergency fund, it's time to throw some extra cash at your retirement investments. Ideally, you'll grow your investments to 15% of your income.
Pay extra on your mortgage: If you have extra, and you are in a solid financial place, put any extra money toward your mortgage. There's no better indication of financial freedom than having a paid-off home!
Save up: No matter what step you're on, if you need to save up for a big upcoming cost, like a child or a car, make sure to focus your extra money on that.
The Bottom Line
Budgeting can feel overwhelming at first, and it can take up to a few months to really get it right. With time and discipline, you will see that a budget is your roadmap to financial success.
Feel like you need some extra guidance and accountability for your budget? Click here to sign up for an virtual consultation with a financial coach at The Financial School. It won't cost you a thing. Successful budgeting, here we come!
Frequently Asked Questions:
How do I budget if my income varies?
This can feel tricky, but fear not! Simply list out your income over the past 6-12 months. After doing this, you can either work with the average income OR the lowest income. Working with the lowest income for your monthly budget can provide peace and security. If you make more money, it can go toward your goals as listed in Step Seven.
What do I do if I messed up on my budget?
A budget is a "living document," and can be adjusted at any time. For the first few months, you will probably need to adjust your budget because you didn't realize how much you are truly spending in certain categories. The biggest example of this is food. People will have big dreams about spending close-to-nothing, but the reality is that we all like to eat.
What if I don't make enough money to pay all of my bills?
This question deserves it's own article, but the answer is simple:
Increase your income: side-gigs, asking for a raise at work, taking on extra hours or overtime, creating a serious plan about how you will increase your income in the future, etc. Hang in there, and work hard.
Spend less, especially in "Step Five" expenses: Try to make small changes to your "Step Four" bills as well, and cancel any services you don't need.
Where can I go to learn more about budgeting?
Check out the Ramsey Solutions Youtube channel for very clear videos that explain budgeting.
Written by: Norah Kearney