How to Budget in 5 Easy Steps
Do you want to look at your bank account one day and see thousands (or more), know you have control over that money, and achieve your financial goals?
Budgeting will put you on the path to success!
Budgeting is essential for you to practice because it organizes your income in a way that makes your life easier.
The same way a business, company, or entrepreneur will forecast future sales and company growth, we as individuals should look into the future to estimate and analyze our personal growth.
All of this and more is achievable with basic budgeting.
I am going to show you how to build a customizable budget, suggest the different platforms you can use, and provide helpful tips you might not have thought about yet.
Here are the five steps to build a budget utilizing the envelope method and zero-based budgeting approach.
1. List All Your Expenses
Did you read that correctly? It says all of your expenses.
Some budgeting techniques, such as the 50/30/20 method don’t require you to list all of your expenses. They say you should put 50% of your take-home pay to bills, 30% to fun, and 20% to savings/investing.
It is an easy method to follow. However, you can be more effective than that.
The first thing you need to do is start writing or typing down every fixed monthly expense with the date the payment is due. These expenses will be your rent, utilities, debt payments, subscriptions, and even gym memberships.
Then, calculate your Grocery and Food expenses to make a grocery budget.
Your grocery budget can include both groceries and eating-out or you can have an independent grocery budget. I rarely eat out. So, I put my eating-out money into a different category.
The point is: to know how much you spend on food a month, set an amount based on that, and refrain from overspending.
You can also categorize home goods. In the grocery budget or a different category. Things like pet food, toiletries, or other expected expenses.
Finally, your Fun Money. Fun Money is what you spend on… fun! Try to track or estimate how much you spend on fun this month, then set a limit you won’t surpass for your new fun money budget.
Add up all your expenses to see how much in total you spend in a month. Then, multiply it by twelve to see how much you spend in a year!
These calculations are vital for the next steps.
Do you have your list of expenses recorded? Great! On to step 2.
2. Subtract Expenses From Your Income (Draft)
You need to understand your income to start making a draft budget.
People get paid at different frequencies. Most people get paid weekly, bi-weekly, or sometimes monthly.
Write or type down the amount of take-home pay you get every paycheck or what you expect to earn (for people in sales or working for tips).
Know the timing of when your bills are due compared to when you get paid.
Align your income with the dates you will have to pay expenses. Some expenses will be early versus later in the month and vice versa.
Below is an example of Joe Schmoe’s preliminary calculations.
Joe plans to use the first paycheck to save half of his rent, pay off all the bills due before his next paycheck, and allocate money to the categories he needs to fulfill at the beginning of the month (groceries, gas, and fun).
The second paycheck will pay the remaining bills that will come due at the end of the month.
Okay, if you’ve done what Joe Schmoe has done, you can see how much money is remaining after your expenses.
Save or invest that remaining money! Furthermore, you’ll take this money from your paycheck first; before you start deducting your expenses.
Have you heard of paying yourself first? This is one way to do it and how you’ll see thousands in your account very soon.
You can do this!
3. Create Multiple Levels
Looking at the example, Joe had four different levels of his budget.
He had a bi-weekly, monthly, grocery, and fun money budget.
It is crucial to understand and track your lower level grocery and fun money budgets. Spending over the amount you set for these budgets can create issues. Staying within the limits will help you stay in control. You have the power to control your money!
Joe can also calculate his yearly budget by subtracting the total expenses for the year from his total yearly income (monthly take-home pay multiplied by twelve).
Whatever amount remains is the amount Joe can save/invest in a year. Creating multiple levels is essential to understand your long-term growth.
Your savings or investing accounts grow for years. To develop the numbers in those accounts faster, you need to have a conscious idea of how much you can contribute each month.
4. Choosing a Budgeting Medium
Drafting your budget shows what you’ll need from a budgeting medium. There are three possible routes you can take when it comes to creating your official budget.
You can go old school like me and write it all in a journal.
Many people opt for Microsoft excel or google sheets because it makes it easy to customize and calculate your budget. You can create the same framework from these steps on excel or paper.
If you’d like a more advanced excel template there is a free one here: Excel Template
The newest trend is to use a budgeting app. You might not have as much control with an app, but they can be valuable because of their unique features. Mint is a very popular app but I have some suggestions if you want to try something else.
My app suggestions:
- YNAB — utilizes the zero-based budgeting approach and provides educational content. This one is not free but has received high praise from its users. Read more here.
- EveryDollar — EveryDollar also utilizes the zero-based budgeting approach, is free, and provides Dave Ramsey’s Baby Steps for getting out of debt. It's simple and customizable. Read more here.
- PocketGuard — This app keeps the focus on your savings and is also free. It provides automation and has an interesting hashtag feature. Read more here.
There are many ways to create your budget, whether you write it down, use Excel sheets, or download an app. Choose the one you know you will access easily and regularly.
5. Final Calculations
It is time to set up your framework and make your final calculations after you choose a medium.
This step should be the easiest with everything you’ve learned!
Once you have the framework, you can create a new budget with the same template every month by writing it out, making a copy of your excel sheet, or using the automation tools in apps.
Every dollar you own should have a destination.
Joe is tracking all of his expenses, savings, and even his grocery and fun budget.
Each expense should be in an envelope or category. All of your dollars fulfill their purpose at the end of the month.
The only budget I avoid spending to 0 is the fun money. I let that rollover!
Conclusion
Building a basic budget should be easy and comfortable for you to do. You should not feel stress when thinking about your money. You will start to feel the reward of being in control after you build your budget.
Remember these budgeting steps:
- List all of your expenses.
- Subtract expenses from your income/draft your budget.
- Create multiple levels.
- Choose a medium.
- Final Calculations.
If you want to contribute more to savings you can see which expenses you need to cut or think of ways to increase your income.
Do you know what to do with your savings or how to invest it? That will be the next step in your financial journey.
Pro Tips:
- Create a free second checking account to store all the funds allocated for bills. Set up auto payments to pull from that account. Use your primary checking account for spending on fun or groceries.
- Track your grocery and fun money budgets so you don’t overspend.
- Mark or color code bills you’ve paid as soon as you pay them.
