Budgeting 101

Making Your First Budget

Let’s assume you’ve never made a budget before, and we’re starting from scratch. First of all, remember that your budget is your plan.  It’s not a set of handcuffs that restrict what you can do. It’s simply a plan where you decide where your money will go.

Before we get into the nuts and bolts of budgeting, most people like some sort of tool to help them along through the process. I used Mint for many years, but have switched to EveryDollar Plus. Mint is free to use, but in my opinion, they bombard you with credit card ads galore. I get it - they need to pay for their work somehow, but my concern is that their marketing approach will lead people to make poor money choices.  

That’s why I recommend EveryDollar. You can use EveryDollar for free if you are willing to manually enter your transactions. One of my best friends prefers this method. I personally like the subscription model that links to my bank and brings in my transactions automatically on a daily basis. I then categorize each transaction into the appropriate budget category. EveryDollar Plus costs $129.99 per year - and I include a subscription in many of my coaching packages.

You may prefer to log your transactions on a spreadsheet, and that works just fine. Here is a link to a worksheet that you can print and follow along, and use going forward.

The key is to have a plan, and then measure your progress against the plan. Here we go. Let’s build that budget!

Start with Your Income

Whether you are paid weekly, every other week, twice a month or once a month - I like to build a monthly budget starting with your income. So take the current month and estimate how much money you will receive during the calendar month. That is the money available to you, and that’s where we start. Some folks may be gig workers and it may be difficult to forecast your income for the whole month on day 1. I understand that it’s difficult, but remember that this is a plan. It’s your plan. Just do your best to estimate what you will earn for the month. If you are salaried, it will be more predictable. Regardless of your pay frequency, start with your income.

And be sure to include a line item for different income streams. If you are married and both spouses work, be sure and include an income line for each spouse. If you have multiple jobs, include a line for each job. This allows you to track your actual income against your plan for each income stream.

Now for Spending

Next, let’s look at the primary spending categories. I like to start with giving, because I find it helpful to start from a position of gratitude. When we are grateful for what we have received, it helps us want to be generous with others. Next comes housing, transportation, food, personal expenses, lifestyle, health, insurance, taxes, and debt.

Giving

Whether you support your local church, your community ministry or other non-profit organization, I’ve found that it is critical to cultivate an attitude of gratitude. And giving is the way we do this. I personally support my local church by giving 10% of my income to enable my church to thrive. My wife and I budget for contributions in addition to that in order to cultivate this behavior.  What is important to you may be different than what is important to me, and that’s OK. The important thing is that your plan includes generosity. And be specific with your plan. If you know you want to support two or three different causes, list them out and be specific with the amount you want to give.

Housing

Now we’re getting into essentials. Whether you own your home or rent, there are a number of expenses associated with your dwelling place. Most people probably have either a mortgage or rent payment. You likely have utilities such as gas, electricity, and water.  Think about cable, internet and TV. Home security systems. Maintenance needs. List each item and the amount you plan to spend on it this month.

Sometimes you get tempted to look back at the past year and take the average monthly expense and just roll with it.  This is a great place to start your plan, but you can do better!  Take heating and cooling for example.  At my house, we live in a nice shady neighborhood, and it takes a lot less energy to cool our house in the summer than it does to heat it in the winter.  If I level my energy budget, I will be off about 75% of the time - some months I will be high and other months I will be low.  What I strive for is to be precise with my plan each month. If we need to tighten some other categories because of a high heating bill, it’s best to know that at the beginning of the month and plan for it.  And if I have a low energy bill because of mild weather, I want to know that so we can decide what to do with the extra cash!

Transportation

We need to plan for transportation so we can get to work, the grocery, shopping, etc. Depending on your situation, this may mean a car payment, Uber rides, bus fares and everything in between. Be sure to detail this out. If you have a car payment, list that as a line item. Think about putting fuel in the car. Consider preventive maintenance, things like oil changes, car washes, etc. Maybe you park in a pay lot for work, be sure to include a line item for parking. Maybe you use a toll road. All of these transportation related expenses go here, and get their own line item to help you build a plan that works. I don’t include auto insurance here - we’ll cover that in the insurance section.

Food

We all have to eat, right? So make sure you plan for food. I like to separate groceries from restaurants, because it helps me see where my money is going. If you tend to eat out a lot, and money gets tight, seeing these separate line items helps you see obvious ways you can make your money stretch further. You can almost always save money by eating food you prepared yourself at home. If you like using a meal prep service, I recommend you list that as a separate line item here as well.

Personal Care

This is where I like to plan for things like haircuts, cosmetics, fun money, cell phones, and shopping for clothes, shoes, household items, and that sort of thing. Subscriptions go here as well, whether we’re talking old school magazines or the latest music streaming service. The point of getting these categories together is to help us see these expenses and understand how much is really a want versus a need.

Lifestyle

This can be merged with Personal Care if it makes sense for you. I like to keep it separate so I can track things I really love like travel and entertainment. I love to travel to places I’ve never been, so my wife and I budget a set amount of our monthly budget to support travel. We also enjoy a few special concerts each year, and we like to save for that. Secret info - I love video games, so the newest PS4 game comes out of our entertainment budget. :)  

Health

I like to see health related items tracked separately because our health is so important to us. If you see the doctor or dentist on a regular basis - and hopefully you do - you’ll want to think about these areas as you complete your budget each month. Let’s say you visit your doctor for an annual checkup. Most months your planned expense will be $0, but that one month a year, you need to be sure and include your share of the expense related to your checkup. Having a line item for Doctor Visit will help you remember to plan for that so that you don’t get surprised when that reminder pops up. I suggest including line items for the dentist and pharmacist, as well as your gym membership, and any other health related expenses that are normal for you.

Insurance

Now we need to think about our insurance bills. Insurance is a great tool to help us reduce our risk, whether the topic is health, life, auto, home, rental, umbrella, etc. I like to group these together to serve as a reminder to consider them all.  

Let’s say your health insurance is provided through your employer and your portion of the premium is deducted from your paycheck. My advice is to list it as a line item with a plan of $0 per month. This will remind you each month as you do your budget that you have health insurance, that your share is being deducted from your paycheck, and you can be grateful for it. On the other hand, you may need to write a check every month for health insurance - this will remind you to pay it.

Similarly, if you have a home mortgage, your homeowner’s insurance is probably bundled with your mortgage payment. Again, list it as $0 expense as a reminder that you pay it as part of your monthly mortgage payment.

The others (life, auto, rental and umbrella) typically get paid on a monthly basis, so you’ll want to list each of those that apply along with the associated planned monthly payment.

Taxes

Oh, yes, we can’t forget Uncle Sam! Chances are if you have a regular job, your employer is withholding taxes from your paycheck and sending them to the governmental authorities on your behalf. If so, again, be thankful for that - because it is so much easier than keeping up with tax liabilities yourself!

Some people, especially those who are self-employed, must set aside money throughout the year in order to pay income taxes. If you’re in this situation, in order to avoid paying interest and penalties to the IRS, it is best to pay estimated taxes on a quarterly basis, based on the profit or income earned in your business or gig work. 

You also want to plan for personal property taxes and real estate taxes here. If you own a vehicle, chances are you will need to pay personal property taxes on an annual basis. Real estate taxes may be bundled in with your home mortgage, but if you’ve paid off your house, you usually pay them annually.  

So if taxes aren’t withheld from your paycheck, be sure and budget for income tax expenses. Same for property and real estate taxes. Set that money aside to pay your taxes when they are due. Don’t let taxes sneak up on you. Plan for them!

Debt

This can be a painful area of the budget.  This is where the credit cards, student loans, personal loans, home equity lines of credit, and all sorts of non-mortgage debt lands. Each of these payments should be listed as a separate line item, so you know how much of your monthly budget each debt is consuming. Perhaps you’re paying the minimum amount, or paying it off entirely each month, or something in between. Whatever your plan is, list it here.

Finally, let’s Save!

Now that we’ve listed all our income and expenses, everything left over is a prime candidate for saving! List those savings goals here - maybe you are saving for your emergency fund, or your honeymoon, or that grand vacation you’ve been dreaming about. Whatever you are saving for, give it a name to add to your motivation!

I hope you have plenty left for saving after paying all of your bills. If not, you have some choices. You can either earn additional income - or you can reduce some expenses. Your budget is only finished when it balances to zero. That means that you subtract all of your planned expenses and savings from your planned income, and the remainder is zero.

If this all sounds overwhelming and complicated to you, schedule your complimentary consultation with me, and let me help you move forward with your financial goals!