How To Build a Solid Monthly Budget
The Dreaded Budget
Ugh… the budget. You know you should be using one, but you really can’t stand how it cramps your style. You also believe you have pretty good control over your financial life (even though you don’t know what stage your in) without one. Well we are here to tell you that there is no way you can meet your financial potential without a budget. We know it is an unpopular position, but hey, our blog is title Bread and Budget…What did you expect?
The reality is, a budget is nothing more than a detailed plan for how you intend to spend your money. Now sure, there are times when a budget is an accountability partner. The budget may say, “You already spent $250 on wings and beer this month.” But the beauty of it is this: If you want to spend that every month, go for it! Just make sure your budget is balanced and you have considered that amount in light of your purpose and goals. The budget does not exist to squeeze the fun out of life. It exists to provide you with discipline and a plan.
Okay, your convinced you need a budget… now what?
The Budget: Prework
The hardest part of budgeting is tracking down and categorizing all of the miscellaneous spending that occurs in your household. Most likely this is easiest done by printing off your last 3 months of statements for your saving, checking, debit cards, and credit cards. Since less than a quarter of Americans use cash, it’s probably safe to assume most of your spending is captured in these documents. Likewise, if you are receiving all of your income in direct deposits it should be listed in these statements. If not, you will have to track that down as well.
Once you have gathered these documents it is time to decide what categories you want to budget for (Quicken has a decent starting list here). You can start as broadly as:
- Personal Care,
- Debt, etc.
You may find though, as we did, that the broad categories don’t provide you with much planning or control in the long term. The most important part is to get started though, and they will be good for that. You can refine these over time.
Time for some math…
After you’ve chosen your categories it’s time to go through your list and categorize each transaction. Yes, each one… Don’t worry, it gets easier after a while. We recommend marking a letter next to the transaction for the category it’s in. For instance, if it is a housing payment, put H next to the line.
Get your calculator out and total up your spending. It may look something like this:
- Income: $3750
- Housing: $1,325
- Internet/Phone: $175
- Transportation: $650
- Food: $550
- Personal Care: $110
- Debt: $650
You may find that you have a number of miscellaneous purchases that don’t cleanly fit into any category. You can try and force fit them, or you can add another catch all category at this point. The bigger priority is just get a sense of how much you are spending. Repeat this process for each month that you have statements for and then average these so you have a sense of how much you spend in each category.
This is your starting point. You may find that you are spending less than you are bringing in, and you just have dollars floating around in your budget… If this is the case, we need to find a way to put those guys to work! There is a good chance however that you find you are spending more than what you are bringing in.
The Budget: Cash Flow
Another tricky part in getting started is understanding your monthly cash flow. This may be less necessary if you use a credit card, but we advise against the use of credit in most circumstances. If you have made the decision to reduce your dependence on debt you will find that there may be certain times when your budget is “pinched.” This means that you have more costs in a period than you do cash to cover those expenditures. This will change over time, but initially it can be difficult to manage.
For this we recommend Dave Ramsey’s Allocated Spending Plan, or you can download an excel sheet we have developed based on that form by clicking here. The purpose of this is to plan your spending to make sure that you never run out of cash, bounce a check , or incur an overdraft fee. If you have questions about the use of this form feel free to contact us.
The Budget: Month 1
Let’s get this out in the open right away: Your first month of budgeting and tracking will probably be a mess. That’s fine. You just have to get through it. However, it is critical that you begin tracking all of your spending. At the risk of sounding like a Dave Ramsey Groupies, we are going to again recommend one of his tools. EveryDollar is an amazing tool that we use almost daily. It allows you to set your budget online and then keep track of your monthly transactions and budget limits using a mobile app. You can share a login if you are keep tracking with a significant other.
This month you will begin having conversations with yourself and/or your significant other about your future needs and goals. Then you begin working those into the budget. Initially this will be difficult and may lead to some disagreements, but it is an important part of the process so don’t skip it. After you have decided on where you want your money to go, spit and shake hands, and agree that this is the budget you are sticking to for the month.
Tracking everything this first month will take some getting used to, but it is critical data for you. You will need to know where and how much you are spending so that you can make better future decisions. It will also help you better identify categories. Throughout the first month there is roughly a 100% chance that you will have to make adjustments. That is perfectly fine! Just make sure that you have allocated every dollar of income into a category. It doesn’t matter if it is towards pizza, or a pilot’s license, just make sure each dollar has a name. The big goal at the end of this month will be to have spent less than you made.
The Budget: Month 2
Depending on the tool you’re using, it should be pretty easy to start next month’s budget. EveryDollar will copy the previous month for you. Again this month you should take a look at your Allocated Spending to ensure you don’t spend money you don’t have. You should also refine any categories that didn’t quite make sense. You might also develop a category to catch spending that didn’t fit in other buckets. Taking into consideration last month’s spending, you should adjust your spending limits to ensure that you budget is a realistic representation of what you will spend. Then it is back to tracking and discipline.
The Budget: Month 3
This should be the month where you are really starting to get the hang of things. There will still be things that pop up that you’ll have to account for in your budget. Just make sure to keep track of them, and next year you will be able to plan for them better. You should also have a better feel for your spending habits. This is where it starts to get fun. With that kind of data and exposure you can begin to make informed decisions about how you spend your money. You begin to limit categories you don’t care as much about and invest more in areas that mean more to you.
At the end of month three, you should begin feeling a sense of control over financial journey. You might even find yourself having fewer money fights. At the end of month three you are starting to catch your groove. And that is a wonderful feeling.