If you missed parts 1 and 2, that’s okay click here and here to go back to part 1 or here to go back to part 2. I highly recommend that you don’t skip the first and second steps in budgeting, if you don’t have a reason to start a budget, you probably aren’t going to keep it and knowing which budget is best for you…well that’s kind of the whole point. So go back, read part 1, and part 2, then come back here and we’ll talk about how to budget your money.
Hey ya’ll, hope everything has been smooth and easy up to this point (let me know if you have any questions here). It’s now time to get into the lab, we’ve been schemin’ now time to start layin’ down the foundations…
Little back ground…When I graduated from college, Kate (my wife) and I were debt free. Nearly every penny I made while working went towards paying for school (if I can work while going to school…so can you). Kate is smarter, she got her Associates Degree in high school and a scholarship for her Bachelors (she was graduated before we met, I had less than a year left). Kate was already working full-time in Marketing, I graduated and started working full-time in Sales. Smooth sailing right? Wrong. We were making more money than ever before, had no debt, and were still barely breaking even every month. We didn’t buy anything extravagant, but our little purchases added up. We never had anyone sit us down and say “yooo come on guys, what’re you doin’, let me help you with this whole managing what you got thing.” I mean who would!? To an outsider we probably seemed to be doing okay. Well we finally figured it out and it changed everything! We no longer felt like we were living paycheck to paycheck. Yeah, it was tough at the beginning, cutting back on little things, it took a lot of reading, goal setting, with a lot of trial and error. I wish we had a guide like this when we started to make it easier…which is why I created it. I hope it’s helpful and will make budgeting a little easier.
Now I know some of you may have selected a budget that doesn’t require you to budget your money down to the last cent, but for the sake of this article I’m going to assume that you selected a traditional budget or plan on tracking your finances for at least a couple of months to see where to cut back and save more. If you’re happy with the budget you chose and don’t really care where all of your money is going as long as you’re saving it, then go ahead and skip to part 4 of the Ultimate Budgeting Guide.
Here are 6 simple steps to create your own “traditional” budget.
Step 1: Write Down Your Income
The first thing you need to know is how much money you make every month. This number should be after tax because that’s the amount of money you are going to budget for.
Action Step: Take out a pen/pencil and a piece of paper (if you want to do it on your spreadsheet or app that works too), this is where you’re going to start. On the top line to the very left, write “income.” Next to “income” write down how much you make every month.
*If you have multiple incomes, under the original “income” you wrote, on the next line write, “income 2.” Then next to “income 2” write your second income number. Below that write “total” and add them up (keep adding lines for more income sources).
Draw a line underneath the total number.
Example: Income 1: $3,000; Income 2: $1,500 Total: $4,500
Step 2: Write Down All Expense Categories
Expense categories are all of your expenses put into their individual categories. Expenses are the cost required for something, anything that you pay for. Each expense should go into a certain category.
Action Step: On the left side underneath your income total, leave a line blank, then on the next line list all the categories your expenses fall into.
Example: Rent, Utilities, Groceries, Gas, etc. (for a free list of 50+ different categories email me and I’ll send a PDF with the full list)
Step 3: Set Goals
Once you have all your categories written you should then start making goals on how much you are going to spend each month. Each category should have its own individual goal.
Action Step: Now on the blank line a little to the right of your categories write “goals,” or “budget” (whatever you want). Under that begin writing how much you feel that you will spend on each category for that month.
Example: Some categories will be fixed (remain the same every month) others are variable (they tend to change month to month) ie. Rent/Mortgage: $1,000, Car Payment: $200, Groceries: $400, Entertainment: $250.
Step 4: Track Expenses
The planning part of your budget is now done. Now the fun part begins 😉 in short you’re done for the day. **High Five** For the next month begin tracking your expenses.
Action Step: There are a few ways to track your expenses and really it all just depends on what is going to keep you motivated. Obviously every month you have some expenses that are fixed or going to remain the same, you can write those totals down next to the goal you previously wrote (rent, car payment, etc.). You also may have automatic payments in place for things such as utilities even though they aren’t necessarily a “fixed cost,” when that payment comes through look at the transaction report attached to your checking account/credit card and write down that amount (again next to the goal you wrote down). For the rest of the categories pick one of the tracking options below.
*On your paper on the blank line next to where you wrote “goals,” or “budget” write “actual,” or “total.”
1. Keep your receipts-Every time you make a purchase, ask for a receipt. At the end of the month separate the receipts into their categories and add them up (gas, groceries, etc.). Write them down (next to it’s goal) under their specific category.
2. Use a notebook-Kate and I started with this one. Every time we bought something we simply wrote it down in a small notepad we had. It didn’t last very long because it is kind of tedious but it’s a good place to start.
3. Track it online-Use the transaction report attached to your checking account/credit card. Add up each category and write it down.
4. Use an app-Apps such as Mint and EveryDollar automatically track your spending for you.
Step 5: Re-Evaluate Goals
At this point you should have all your categories written down with a goal attached to it. Next to the goal you should have how much you actually spent during the previous month. This is the reason no matter which budget you chose in Part 2, I feel you should track your spending for at least a couple of months. You’ll probably notice that either you went way over your original goal or maybe you actually got pretty close. How ever you did the principle is the same, find out which categories you can improve on (cut spending or add spending) and re-write your goal for the next month.
Action Step: Next to where you wrote “actual,” or “total” make a third column titled “difference.” Take the number you wrote down for your goal and minus the actual amount you spent, this is the difference. This number tells you how you can improve. If you were close or under your goal but feel you can spend less in that area you may want to write a goal with a smaller number. If you were way over and don’t feel you can cut anymore in that area, write a goal that’s a little bit higher, but still challenges you to save money. When you do this for a couple of months you’ll find that you can save in a lot of areas that you didn’t think you could before. At the end of it all, you’ll know where all of your money is going which is very empowering.
Example: Category-Groceries, Goal-$300, Actual-$378.94, Difference- (-)78.94, New Goal-$325
Step 6: Keep on keepin’ on
After a few months of using a traditional budget you might want to switch to one of the automated budgets (see part 2) or keep going with the one you already created. The most important thing here is that you’re spending less than you make and building the foundation to your wealth. So keep on keepin’ on, and when the daily, weekly, or monthly grind hits keep your ultimate goal in mind.
Bonus: Challenge fixed costs
As you get better at budgeting you’ll begin to challenge yourself to spend less in certain areas such as how much money you spend eating out or how much gas you use. You’ll probably plateau at some point, but by then you’ll be an expert budgeter. At that point start challenging you fixed costs. See if you can find cheaper insurance, better interest rates, cheaper phone bill, etc.
Part 3 of the 4 part budgeting series, learn how to set up and budget your money. Part 4 is about what to do going forward. You’ve set your goals, picked a budget that is best for you, tracked your spending, and started saving money, now what? Find out in Part 4. If you want the free list of 50+ different categories or the budgeting template, shoot me an email and I’ll send the PDF.