I really want to someday say I’m great at this but quite frankly as of today, I suck. I run two budgets simultaneously (one for myself, the other for my home) so I can share my struggles and successes from using them for about the last year or so. I’ve quickly learned my personal budget goes over more often than the budget for my home. This is simply because my home doesn’t have emotions, my home does not get hungry unexpectedly and my home doesn’t buy new clothes when there is a sale.
Nonetheless, my personal budget is usually more fun to make and adjust because it allows me freedom to spend responsibly and not feel guilty after certain purchases.
This will be a relatively long post.
Before we begin building our budget together, let’s first lay some mental groundwork.
Our budget is built with our money goals in mind. If we have no goals for our money, we are wasting our time and we will quickly discard it. Trust. Me.
Our budget ought to be reviewed and adjusted at the beginning of the month, before the month starts. If we wait till midway through the month when expenses are already in, it is no longer a budget it is now an expense report.
Our budget is a forecast of our income vs. our outgo. It does not need to be perfect or accurate at the end of the month, middle of the month or beginning. It is our guide for the month, and we will adjust accordingly as we go.
My advice, if we find we are overspending in one area, that area might not be our problem in the budget. It might be ratio of other expenditure that might be killing the cashflow. Let's not complain about our phone bill if we are always buying takeout every night. We need to look at our budget as a whole, not a sum of parts. It might also be that we have an income problem. If the expenses are as low as we can feasibly go and we still can’t get traction, more income is needed. Either way we have a cashflow problem. We’ll get to this another day.
On that note, let’s begin.
Building the budget.
First, we need to figure out how much we make each month. This is what we are basing the budget on, so it vital to know what we are working with. I generally suggest we underestimate our income if it is not a steady and stable number.
Let’s say for example you make $2500/month. That is your income. (Seems obvious)
If you get an inconsistent allowance of say $4000 every other month, base your month’s budget on $2000. If you do shift work and generally get somewhere between $800 - $900 biweekly, base the budget on the lower end so $800/biweekly = $1730/month (1733.33 rounded down). The extra that we rounded down will cover overages as we spend through the month.
For simple math, I will be assuming $2500/month throughout this post.
Next, before we even think about our expenses, what useful goals do we really want to achieve with money in life? Buy a house? Invest? Travel? Save money? Pay down debt? Let’s figure that out here. What does it cost to do this? How fast do we want to achieve these goals? Let’s figure out the exact number so we can ensure that it is achieved.
Say, I want to travel AND buy a home. I estimate I’ll need $3000 for a nice getaway and $10,000 for a down payment then another $3000 in closing costs. I say I want to achieve this in 16 months(A year and 4 months in time for summer).
So if I need $16000, in 16 months. I need to be saving $1000/ month. Pretty simple.
I now know I have $1500 left to plan my expenses on.
You can also consider putting your tithes here if you give to your church.
If you give regularly to your family or a cause you strongly believe in, this is where you’d budget that.
If you want to save for emergencies or to have savings, I suggest you do that here as well.
Do not wait for expenses to take its cut of your money before you get the opportunity to do anything.
Expenses.
I generally start by taking things I want to do off the top. Most people take deductions off first but I’ve found that by having the things I want first, I’m forced to find ways to figure out the ones that MUST be done.
The mind works in a weird way like that. If my phone bill needs to be figured out somehow, I have to go to work or find a cheaper plan with similar comfort. If I want a new thing I don't need but could really use, winter boots, winter coat, etc.
Figure out what you want, your mind will subconsciously solve what you NEED. Try it.
So, I would take a nice $250 for my enjoy life fund. This should cover my dinners, my clothes (that I don’t need), giving to others, seasonings I want to try in my meals, etc.
Now I have $1250 left to plan what I need.
Rent – I can survive on $650/month, the place ought to be nice enough. I can share a house with friends if necessary. It should cover all utilities and internet. I think I’m good.
I’ve got $600 left.
Maybe I use an “iphone” so a $100/month phone plan should cover me.
$500 to go.
I like food so I’ll do $300 for groceries and personal effects.
$200.
Gotta move around, so $130 on a monthly bus pass might be fine.
$70 left.
I will keep this as cash at hand. So I keep the $70 as life happens. I want to buy a coke here and there, or a coffee might be nice. I use this for it and nothing else.
The Budget
We have now officially created our first budget.
Income $2500
Goals(Money Shovel) $1000
Enjoy Life $250
Home $650
Phone $100
Groceries/Personal $300
Transportation $130
Life Happens $70
Planned Left Over $0
Reviewing the budget
Once we’ve got this budget, this should guide us through the month. In order to have this be a guide we need a place where we can constantly check and review our progress from.
There are services that provide this feature if you’re serious about using your budget. The two that I have personally used and liked a lot are Mint & EveryDollar.
Mint is my preference but you need to connect your bank accounts to it for it to be completely useful. It has a lot of features like tracking your goals as well, your cash position, debts, etc. EveryDollar can connect to your accounts as well but that is a paid version of the service.
Wherever and whatever you choose, spreadsheets, apps, websites, paper is up to you. Do what is best for you. Place your budget where you can quickly consult it, and automate your visits. It needs to be quick to find, easy to read, easy to understand. As you spend through the month, update the budget with your progress. You should know how much you have left as you spend.
You need your budget to come at you like clockwork. Start to know your numbers. It’s unique to you and is yours to control.
If your friends ask you to come for dinner, have you blown your enjoy life fund yet? No? Alright, we move.
Is the Life Happens fund large enough and can handle it? Yes? Let’s Go.
Hay! That shoe I’ve been eyeing just went on sale, is there money for it in the budget? Yes? Bought.
Adjusting the budget.
Now that we have our budget, each month is not always going to be like this. One month, we might “need” a new phone, or a new blazer for that really important meeting. When we know the unplanned is coming, we need to get ready for it.
Say, I know I want to move to a nicer place, our neighbourhood isn’t that good, I'm tired of living with people or it would be nice to be closer to work, what do we do?
Well, we could find a cheaper phone plan, say drop that down to $50 to repurpose $50 for the home.
We would survive if we travel in fall (4 months later) so instead we change our money goals fund to $800 to add another $200 to our home fund.
Now we have;
Income $2500
Goals(Money Shovel) $800
Enjoy Life $250
Home $900
Phone $50
Groceries/Personal $300
Transportation $130
Life Happens $70
Planned Left Over $0
This is how we would adjust our budget. This is just a basic template of how I do mine.
Budgets can get significantly more complicated and usually have more categories than I have mentioned. It is up to you to purpose each dollar for whatever you are trying to do.
LAST thing,
What if at the end of the month we have a surplus left over or a deficit?
I would suggest we roll it into the next month’s budget. Our goal is to be in a surplus most of the time. Try to use the surplus to get our goals done and accomplished that much faster. If we underestimated our income and stayed within budget, we would easily achieve this.
So for this example we want to do something like this or a variation of this,
Income $2500
Last Month’s left over $X
Goals(Money Shovel) $800
Enjoy Life $250
Home $900
Phone $50
Groceries/Personal $300
Transportation $130
Life Happens $70
Planned Left Over $0 +/- X
Final, final thing.
Some people budget in ratios. So they'll suggest you not spend more than 25% on transportation, or more than 30% on housing, 15% on savings, etc. You can factor those into your budget for sure. I would just suggest, whatever you do, make sure you are accomplishing goals you've set for your life.
We are going to work for the next few decades, it would be a shame to have nothing to show for it at the end.
As always, I don’t know what I don’t know. If you know, please share your knowledge.
Cheers,
Happy Budgeting!
