Stay with me on this because what we do in today’s challenge will be a game changer! It’s time for us to start a budget. If you have never done this in the past, it’s going to be life changing. Budgeting for beginners is really easy when you follow the steps. When you boil it right down, here’s how to make a budget is a simple 7 step process.
First, get your head around budgeting.
When it comes to budgeting, you need to get your head in the right place.
First of all, let’s forgive all the past financial blunders that have happened. We all have them. It’s how we learn. Move on.
Second, start to see budgeting as a path to freedom.
So many people hold off on budgeting because they think it restrains them.
The opposite is true.
Budgeting equals freedom.
Keep this in mind when you notice yourself checking out. Don’t let the old you keep you from moving forward. You’ve come so far already.
Let’s dive in!
Step 1: Gather up your income.
Before you can spend money, you need to know how much you are making.
This sounds pretty logical, but in a world of keeping up with the Joneses, we tend to forget that.
What I want you to do is write out how much you take home after taxes.
If you have your own business and your income is inconsistent, I want you to use the lowest number you take home in a 12-month period. If July is your lowest month, you will use that month as your baseline. It makes budgeting easier.
If you get a regular paycheck every month, use that.
The key here is to try to aim for simplicity.
Write this number down at the top of the sheet. Next, we are going to start deducting things from it.
Step 2: Decide on how much a month you will save.
When you know how much you want to save, then you work everything around it.
Luckily for you, we did this in Day 5. So you know how much you want to save.
From there, you can do all your other budgeting. Don’t fall into the trap that you will save whatever is left.
That has never worked for anyone, ever, in the history of time.
Pick an amount and enter it into your budget, and make sure you include retirement in case you left it out.
Step 3: Gather up your debts.
We did this in the net worth step, so take that sheet out that has all of your debts and put down all of your monthly payments.
Enter each payment on its own line. Write down any of the following:
- Mortgage
- Student loans
- Credit card payments
- Car loan payments
- Home loan payments
- Credit cards
- Car loans
- Personal loans
- School loans
- Home renovation loans
- Medical bills
- Hospital bills
- Layaway bills
- Collections
Other Debt Payments: (specify what they are)
Step 4: Gather up your fixed monthly/annual costs.
This is the section of your budget that doesn’t change much, if at all, from month to month.
The expenses that go in here are things that you have to pay for every month. Here are a few of them:
- Heating fuel
- Gas
- Electricity
- Phone bill
- Cell phone bill
- Garbage pick-up
- Car insurance
- House insurance
- Life insurance
- Water bill
- Sewage bill
- Utility bills
- Property Taxes (if not included in your mortgage payment)
These expenses are what I consider the cost of living. You pay them every month and don’t really think about them. For now, get them down on paper.
If you find that some of these fluctuate (like gas bills if you live in a colder climate), then use the higher amount. Or see if your provider can put you onto a payment plan that averages out your expenses every month.
We did it, and it makes budgeting a lot easier. It’s a lot easier to budget for the highest month and have extra than it is to budget on the low side and realize you need more money. Just my 10+ years of experience.
Step 5: Write down your Recurring Discretionary Expenses here.
These are things that are nice to have, but you maybe don’t use them as much as you should or things that you choose to spend money on every month. Think memberships and subscriptions.
Make a line item for things like:
- Gym memberships
- Streaming services
- Music subscriptions
- Magazine subscriptions
- Food delivery services (Blue Apron and Hello Fresh)
- Amazon Prime
- Apple Music
These are like the fixed costs except they are choices we make. Don’t worry about if you should keep them; we will go into that another time. For now, just identify them all.
Step 6: Gather up your necessities (monthly spending on items).
This is usually the hardest part because until now, you may have no idea how much you spend on different things.
The best thing to do with this section is to start tracking this month and see where your money is going.
Personally, I use Tiller to track my spending so I know my monthly expenses.
Tiller is nice because it downloads everything onto one spreadsheet and you can divide your spending into categories.
Then, it totals it up for you, so you can see how things are going month after month. I have mine going back the past 8 years, and it’s eye opening.
For instance, I can go back to see what I spent on food in January 2013 and see how it compares to other months and years. It’s really interesting when you can go back and see.
In fact, tracking your spending will be the single biggest eye-opening experience since having kids.
When we started, I thought we were pretty good on certain things, and I was so very, very wrong.
By tracking your expenses over time, you will know the real truth about your spending. In doing that, you can start to fix the holes in your money bucket. But for now, let’s just write down what you think you can spend.
Here are some of the accounts to get you started
- Food
- Restaurants
- Clothes
- Make up
- Prescriptions
- Shopping
- Entertainment
- Entertaining
- Alcohol
- Household Items
- Household Maintenance
- Household repairs
- Car Maintenance
- Car Repairs
- Gas
- Education
- Health
- Daycare
- Kids activities
- Kids clothing
How detailed should my budget be?
There are two schools of thought of this, and they are on opposing sides. You can either be hyper-detailed or take the 10,000-foot view.
When you are starting out, a detailed budget is a great way to get your bearings with your spending.
After some time, or if you have been budgeting for a while, you can go more general.
For instance, we used to budget our food into different categories, such as entertaining, kids food, lunches, regular staples, meat.
Now we just have a food budget. But it’s only after 10 years that we have let up. At first, the finer details were helpful and enlightening.
Start to Track Your Spending
Ok, so once upon a time, there used to be pen and paper for tracking your money. Fast forward and there are tons of apps many of which can do this for free or very cheaply.
Tiller (what I use) – for less than $5 a month
Tiller can automatically categorize your spending; it can be set up very quickly for it. Usually, when you start tracking your money, you can go back a few months and see how things are going. If you aren’t up for that, just start tracking your money going forward. This will be key in the upcoming steps.
It doesn’t really matter what you use, but make sure you are tracking every cent you are spending. It’s key to becoming debt free faster.
If you want to make your own sheet to track manually, then take a piece of paper and make the following columns:
- Date
- Place
- Amount
- Category
- Details (if needed)
Another option is Mint, it’s free but it’s limited in it’s capabilities. Still if you only have a few bank accounts it might be a good fit.
Knowing where your money goes is ultimate power.
By doing this, you will be edging yourself into the 10% of people who are on top of their finances.
It’s a place worth getting to.
If you want, you can get a free 30-day trial with Tiller here. Personally, my experience with them has been nothing short of incredible. I get a daily email that shows any new transactions that were posted to any of my accounts.
I love it. It’s so much easier when you get a daily email about your spending. Plus, the ability to categorize your expenses however you want is a huge advantage. I use the Lauren Greutman budget template and it’s really useful.
When you start budgeting
When you are starting to budget, you are really guessing at most of your spending. That’s ok.
This is new and not knowing things is exactly how it’s supposed to be.
Remember we are looking to make improvements over years, not days.
So when you are tracking your spending, pay attention to things.
What you are looking for are mini AHA! moments.
Those times when you look at your spending over the past few weeks and find out you have an area that is higher or lower than you thought. Those observations can help you get a true sense of where your money is going, when, and why.
A few thoughts on budgeting…
Ok, budgeting sucks… at first. It can feel like you are living in a straight jacket, and that’s not a fun thing.
But it’s actually the opposite.
By learning to live within your means, you begin to free yourself from keeping up with the Joneses.
It’s a pretty simple concept. Do what everyone else does, and you get what everyone else gets.
Everyone (and it’s really sad to say this) is in heavy debt, working jobs they don’t like to pay for stuff that they don’t need to try and impress people who don’t care.
That’s the honest truth.
The car you bought to impress your friends. That lasted 10 minutes in their heads. Then they went back to thinking about their own lives. And you were left with 5 years of payments.
When you look at it like that, it probably wasn’t worth the price you paid.
You need to break the cycle. Quit keeping up with the Joneses. They are broke and unhappy.
End rant.
So yes, this process will feel different in the beginning. The very first time the first person wore shoes it felt funny.
New things will feel weird at first. But deep down this will be good for you.
Finally, Give Yourself Time
The first month we tried budgeting, we sucked at it. And the second month, we sucked again. Even the third.
But we stuck with it, and it got better.
That’s life.
There are all types of budget busters out there. And you need to treat budgeting as a moving target. Things will change. That’s life.
Roll with it and give yourself time to get it right. It will pay off in the end.
What if I go over my budget?
Then you are exactly like the other 99.99% of people out there. The only difference is that you take this opportunity to learn from it.
That’s the important part about budgeting.
Most of us go over, and we shrug it off and say “Oh well, I’ll just take it out of savings.”
That’s a losing game, my friend.
Instead, take a look at things. Where are you going over? Why?
Eating out too much? Then, check out these recipes you can try at home.
Gas bill too high? Start carpooling with someone in your area or take the bus.
Heating costs too high? Dial back your thermostat and put on a sweater.
The point is to identify the issues and work at fixing them.
Rome wasn’t built in a day, but it did burn down that fast. Focus on building slowly and you will get there.
Just remember your budget is an evolution. You won’t get it right the first month, or the second. By the third, things will start to make more sense. By the end of year 1, you will be a master at it. Just keep plugging away at it, and it will get better.
What if I have a spending problem?
If you go over budget and you can’t pay your bills, then you need to take a good hard look at your spending.
I know some people can’t make ends meet because of extenuating circumstances, but if you aren’t one of them, you need to look at things and make some tough decisions.
First, cut up your credit card. If it’s your source of debt, get rid of it. Don’t feel ashamed. We’ve all been there. But keeping it around “in case” means that you are using it more than you need to, and now you have to pay it back.
Next, you may want to try a zero-based budgeting system. You can read about it here. But the essence of it is that every dollar has a purpose. And you don’t go over your spending.
Think of it like a cash budget. If you have $500 in your food envelope and it’s gone in week 2, then you have 2 weeks of borrowing from your other accounts or eating homemade macaroni sans cheese.
It’s harsh, but it’s a good way to learn to budget quickly.
My own story
When we started budgeting, we tried out a bunch of different ideas. The truth is one person’s dream budgeting method is another person’s nightmare.
For us, we gave our money a purpose. That changed everything. More on that next time.
Action Steps for Today’s Challenge
Take out a piece of paper (or head over to this section in the workbook) and do the following:
- Write out your monthly take home income.
- Write out how much you will save automatically every month.
- Write out your monthly debt payments.
- Write out your monthly fixed costs.
- Write out your monthly subscriptions.
- Write out your monthly spending on all other items.
- Total up your income and minus all your expenses and savings, anything that is left over can be put aside.
This was an outtake of the Money Kickstart Challenge, 10 easy steps to transform your finances and get you start on a better path.
You can pick up your own copy of the Money Kickstart Challenge here. The guide is 100% FREE.
