Building a budget could be argued as step 1 of any financial planning exercise. Without this, I’m not confident that any other measures will matter in the long-run. According to The Penny Hoarder, A little over 55% of Americans do not use a budget to manage their hard-earned income. CRAZY! Follow along to see how you can build a better budget, today!
Where to start with building the budget
This may seem like a complicated task, but it’s really not. There are two things you need to know when building a budget.
- Income: you need to figure out how much income you have after taxes, health insurance, 401(k) contributions, etc. Note that some people budget before these things come out, but it’s much more complicated.
- Expenses: take out a pencil and start tallying up the bills! This is everything from rent/mortgage, to car payments, to your ever-increasing Netflix bill.
Once you’ve gathered these two things, you’re ready to start with the foundation of your first budget.
Constructing your first budget
I’m going to try to break this down as easy as I can. In reality, your budget consists of net income (after deductions) and subtracts expenses to leave you with either a surplus (positive balance) or a deficit (negative balance). A very simple version looks like this:
| Date | Description | Amount |
|---|---|---|
| 1/1/2023 | Bob’s Paycheck | $2,000 |
| 1/1/2023 | Rent | ($1,100) |
| 1/1/2023 | Netflix | ($16) |
| 1/1/2023 | Car Payment | ($500) |
| 1/1/2023 | Groceries | ($150) |
| 1/1/2023 | Gas | ($75) |
| 1/1/2023 | Eating Out | ($100) |
| ENDING BALANCE | $60 |
Okay, so Bob isn’t doing so hot in this pay period. He’s only got 60 bucks left after it all shakes out. If you noticed, I put the payments servicing debt at the top of the budget because they should be a priority. As you go down the list, some of the items could be trimmed as needed. For example, you could stop eating out and driving around if you are running out of money.
Let’s look at the next pay period:
| Date | Description | Amount |
|---|---|---|
| 1/15/2023 | Bob’s Paycheck | $2,000 |
| 1/15/2023 | Utilities (water, trash, electric) | ($250) |
| 1/15/2023 | Groceries | ($150) |
| 1/15/2023 | YouTube TV | ($70) |
| 1/15/2023 | Gas | ($75) |
| 1/15/2023 | Eating Out | ($100) |
| 1/15/2023 | Emergency Fund Savings | ($500) |
| ENDING BALANCE | $1085 |
This is it. This, literally, is budgeting!
Budgeting going forward
Budgeting breeds freedom. If you budget, the truth shall set you financially free. Okay, so that’s not the quote I was looking for, but you get the point.
“You’ve probably heard the phrase “there is no freedom without boundaries.” This phrase is applicable as a rule to the use of a budget to manage your daily, weekly and monthly cash flow. When you assign each dollar you earn a purpose in your budget, you give yourself the freedom to spend your money, knowing all your needs are covered.”
Juan Toran, Fiat Wealth Management
Realistically, you shouldn’t budget because some guy on the internet told you to. But instead, you should budget because you care about your money and you want to better track, plan, and invest it.
I can’t tell you this article will change your life, but I can tell you that taking small budgeting steps will make a big difference over a lifetime.
Budgeting help from the pros
I’m sure some of you are still scared after reading this. Fear no more, I have several possible solutions for this! There are a slew of companies that now offer budgeting websites and apps that are designed to make the task easy.
Over at NerdWallet, they show 8 recommendations that can help you better refine your finances!
At Forbes, they have a few suggestions of their own!
Be careful – don’t think that just because you bought a budgeting app you’ll get wealthy quick – this author wholeheartedly disagrees!
Building your budget for the future
As you grow financially, you’ll be able to improve your methods and become more complicated (or less) as you see fit. For me, my Google Sheet has become pretty advanced as time has passed.
I have integrated Net Worth (NW) trackers, retirement income projections and drawdown charts, bill payment reminders (for annual things like Life Insurance) and key date reminders for things like Driver’s License renewals. I’m not sure what I would do without my all-inclusive Google Sheet!
Once you have this budgeting thing figured out, you should check out our piece on end of year accounting to see how your plan stacks up at years end!
