If you have every wondered how to start a budget, but really weren’t sure that you wanted to, keep reading to learn how and why you really do need a budget.
I can’t even count the number of times we started a budget and failed.
It sounds all fine and simple to write down your income and expenses, don’t spend more than you make and set some aside for savings. Boom. Easy. Done. Buy me a Lexus.
Except, just like dieting, if it were that easy, we’d all be skinny and rolling in cabbage. And driving a Lexus. Or a Tesla if that’s your thing.
It’s kind of weird how many food references I can make when it comes to money.
Put down the bread!
Ok, I’m off on one of my crazy tangents, let’s get back on track.
I want you to understand that a budget is critical to taking control of your personal finances. While I’m sure that there are a handful of accidental millionaires out there, for most us, we can’t get anywhere near financial confidence without knowing exactly how much is coming in and being intentional about what goes out.
So if you don’t want to live on a budget, get over it. You need it. It’s like toilet paper. You can get by without it but there will be a huge mess to clean up.
What is a budget
A budget is a monthly plan for your money, plain and simple. It’s not a means to unhappiness and restriction, in fact, a budget can actually free you up to spend money without regret.
A budget is written down. It can be on a napkin, in a notebook, on a computer, or on a mobile device.
A budget is fluid. It adapts and changes based upon how your life unfolds.
A budget is proactive instead of reactive. With a budget, you assign your income to certain expenses and you don’t exceed the limits you set. Do you currently live reacting to how much money you have left after you spend it rather than assigning every dollar a job before it leaves your possession? A budget turns that process around!
A budget puts you in the driver seat of your finances and allows you to achieve your goals.
Why you need a budget
A budget is like a road map (oh how I love my analogies). You might be able to arrive at your destination without one, but you will experience road closures, dead ends, and lots of delays along the way. Or you might end up like Thelma and Louise – driving clear off a cliff.
How many different ways do you pay for things? Credit card? Debit card? Check? Cash? And how do you keep track of what goes out? My gut says that you probably don’t. You probably wing it every month and so long as there is at least something left in your accounts at the end of the month you call it a win.
But you can never get ahead if you wing it. You can never be in control of your money if you don’t control where your money goes. And you can’t control where your money goes until you identify what you have, identify your actual need based expenses, and create a plan for the difference.
A budget can be magical. It can change your entire perspective, help you get out of debt, help you save up for something you have always wanted, help you send your kids to college, help you retire in style, and help you live each day looking forward to the future instead of afraid of what comes next.
How to start a budget
There are two layers to a budget, your income and your expenses. You need to be able to track them both. Ideally in detail. And your expenses come in two types – need based and want based. There is a further breakdown of expenses in the form of debt, but some debt is need based like a mortgage, and some is want based like new furniture or a television you put on a credit card.
Step 1 – The Absolute Minimum
Your first step in starting a budget is to make a list of your monthly income and need based expenses. Food, shelter (rent or mortgage), utilities, gas, insurance, etc. These expenses are the things that are basic to your survival. Do not include debt aside from a mortgage (if you have one) in step 1. This step is to get you to understand and evaluate your minimum bottom line.
Step 2 – Debt
Now, make a list of your debt (remember, a mortgage is shelter and goes under “need” above). List the total owed and the minimum monthly payments.
By the way, a car payment is debt, even if you need a car to get to and from work. A car depreciates and the goal for a vehicle is that if you can’t pay cash for it, it costs too much. So we are going to include it as a want, not a need. In the end, it doesn’t really matter, but down the road, separating it here will help you evaluate what you can and cannot trim from your budget should you need to find a way to cut back.
Step 3 – Additional Expenses
For this step you need to identify additional expenses you have. Do you take your mom to breakfast once a week? Go to the car wash? Pay for Netflix? Visit the hair salon? Have vehicle registration expenses?
You also need to identify any and all potential expenses you have throughout the year. Write them down along with the month the expense is due if it’s annual. You also need to estimate how much you might spend on things like clothing and other items that don’t necessarily have a set amount or set timing but that you may need in a typical month or year.
Step 4 – Do the Math
Now the fun part (that’s sarcasm) – do the math. First take any annual expenses that you identified and divide by 12 so you have a rough estimate of how much you need to set aside monthly to cover them. Add these to the rest of your monthly expenses (including debt) and subtract from your monthly income.
If you have a positive number, great! Your budget will help you direct that excess cash in a way that can really help set your future on fire!
If you have a negative number, don’t despair, a budget can help get you in the black and set you up for success. It just might take a little bit of compromise and creativity.
As a word of warning, most likely you are spending way more than the simple math we did here revealed. When you don’t live on a budget and don’t track your actual expenses, your estimate of your expenses is probably way lower than reality. But this exercise is critical to do before you look at your actual expenses. It lets you see the difference between what you can live on and what you are living on.
And this is where budgets really shine.
Why budgets fail
Budgets fail for the same reason diets fail – people don’t stick with them or they aren’t honest with themselves. You have to track every dime you spend and you have to limit your spending to what you can afford.
I keep bringing up the diet metaphor but it really is very similar. If you are sneaking food and not subtracting it from your available calories, your diet will fail. If you are spending more than your income allows your budget will fail.
You have to be honest with yourself.
Why budgets work
Budgets work. They do. But you absolutely have to make it a part of your routine and be honest and accurate with it.
They work because you just can’t argue with math. The numbers either add up or they don’t, and if they don’t then you need to adjust your spending in one category to accommodate another.
But another reason they work is because a budget inspires a feeling of power and control in an area where you previously felt completely powerless. There is something so liberating about telling your money where to go instead of wondering afterwards where it all went.
A budget makes you the boss of your money.
There are a lot budgeting tools available online. Some are free, some are not. All of them will work but not all of them will be a perfect fit for you. It honestly just depends on how nerdy you are and how in depth you want to get. You could even create your own Excel spreadsheet if you are good with Excel formulas.
I’m not going to get into recommending any specific budget software right now, except to say that I personally use YNAB. It’s amazing and pretty much fully featured. I have tried many of the rest, and they each have their own pluses and minuses. You have to decide which one is the best fit for you.
You seriously need a budget
Really, you need a budget. One that is written down and zero-based (meaning that you assign a job to every single dollar you earn). And once you setup your budget (if you skimmed, learn how to start a budget above) and work it for a couple of months, I promise you that you will wish you had done it sooner. You will feel empowered. And you will find yourself on a direct path to achieving your goals of financial confidence.
Do you currently have a budget? Do you use any of the software above? If you do, I’d love to hear about it. If you don’t, let me know which one you decide to use.