I can remember my first budget. It was 2003. My husband, a second-year veterinary grad student, and me, a college junior had just gotten married. We were looking for jobs to survive the summer. We both ended up working for the apartment complex we lived in. I cleaned apartments and my husband worked manual labor on a maintenance crew.
In those days, I wasn’t sure how or if we could make ends meet. A budget was critical. Only spend $X on groceries or we won’t be able to pay for gas. There were a lot of ramen noodles. My husband donated plasma as often as he was allowed to have a little spending money. I watched every penny going in and out like a hawk, because if I didn’t, we’d be in trouble. Pen, paper and determination.
The Foundation of Personal Finance Success
Today, we have been blessed with good careers that make our personal finance situation much less dire, but one thing hasn’t changed. I still keep a budget and balance our expenses to it monthly. I’ve learned a lot over the years. I am a firm believer that having (and following) a budget is fundamental to personal finance success.
How you view a budget is crucial to how well the budget will work for you. There are a lot of hang-ups people have about money that a budget won’t solve. Maybe you have a toxic relationship with money that you should reflect on first? Remember the budget isn’t the enemy. It’s not about always saying no. It’s about knowing what you’re saying yes to, and it can be the biggest step you may ever take to personal financial freedom.
Fortunately, a recent survey indicated that number of people who budget is growing. In 2021, PR Newswire reported that 80 percent of Americans have a budget, which is a 12 percent increase from 2019, and 88 percent of those with a budget said it either got them or kept them out of debt. This is one area I think it’s safe to follow the crowd! Are you ready?
How to Build a Budget
Creating a realistic budget is the first step towards financial discipline. Your budget will make you more aware of your income sources, provide a guide for your spending, and a strategy to reach savings, retirement, and giving goals. A quick Google search for “budget example” will show you that there are a ton of online resources and apps to aid in this process. Don’t pay for a software or app. There are way too many free options. I still use a customized Excel spreadsheet for my budget. I like letting Excel do the calculations for me. A ruled piece of notebook paper and pencil also work just fine.
- Gather all information about your income: Pay stubs, bank statements, savings or investment account statements, etc. Know what your total income is on a monthly basis.
- Gather all information about your expenses: Checking account statements, credit card statements, bills, etc. Total your expenses for one month by major categories like: Rent, car payment, groceries, eating out, entertainment.
- The top line of your budget should be a total of all income available to spend each month by source (i.e. your job, spouse job, interest/investment income, etc). This total should be your budget limit for the month, if your goal is to avoid debt (and it should be!).
- If you’re looking at a pay stub, don’t use gross income. Uncle Sam takes his cut first. So, be sure to only use the net number, which is the income that is actually deposited into your account.
- Next, list your expenses with expenditure type and amount in order of requirement and importance. If you’re a follower of Christ, tithes should be the first item deducted. Debt payments are required and carry serious consequences if you default. Mortgage and/or rent nears the top. Then, take out utilities, food, car insurance, health insurance and other high priority items. Finally, see what’s left over for the less necessary items. While we all love our streaming services, those type of expenses should be near the bottom.
- Then, deduct the total of all monthly expenses from the total of monthly income to calculate your balance.
- If the balance is negative, it means you’re likely going into debt each month to pay for your lifestyle. Start examining your expenses for what you can reduce or cut to reach at least a zero balance (expenses do not exceed income).
- If the balance is zero, that’s a good start. Unless savings and retirement contributions were listed in your expense list, you will still want to look at ways to reduce expenses to save money. Building an emergency savings balance equal to 3-6 months living expenses is truly one of the best signs of personal finance stability.
- If you have a positive balance (money left over), that is fantastic! For personal finance success, aim to have at least 15% of your income left over after all expenditures. Make a decision about what to do with that money. Don’t just let it sit in a non-interest bearing account.
- The final step is to determine if the amount you’re spending in each category is what you want or need it to be. Then, set your expense limit for each category per month.
Budgets vs. Good Budgets
Having a budget and having a good budget are very different things. If you complete the steps above and never look at it again, you have a budget, but it’s not a very good one.
Good budgets are realistic. If you’ve never cooked a homemade meal in your life and decide to reduce your eating out budget by 50% next month, that’s probably not very realistic. That’s a lifestyle change, not a budget change. One of the biggest lessons I’ve learned about budgeting is that changing a number in my spreadsheet without committing to change my behavior is pointless.
Good budgets are balanced at least monthly, possibly more often if this is your first budget or if you made a change. Each month you add up your expenditures for the month by each category and see how it compares to the limit you set. This helps you stay on track and make adjustments as needed.
Good budgets are flexible. Life is unpredictable. My budget does not look the same month to month. If I know we need a new set of tires next month, I might reduce my savings that month and add it to the repairs/maintenance budget.
Good budgets provide awareness to make educated choices about your finances. A budget is just information. What you do with that information is where all the magic happens. If you have a family, involve them in the discussion (children too depending upon their age). If they aren’t bought in, you’ll likely face an uphill battle in following your budget.
A good budget is a guide you set to help you reach bigger picture, longer term goals. Maybe your family wants to go on that big vacation next year? While nobody likes to skip their favorite special beverage, maybe it’s easier to give up for the ski slope? Maybe that moody teen would seek a few extra hours if the additional income means a chance to perfect their summer tan on the beach? Ok, that might push the boundaries of being realistic too!
Getting started is always the hardest part, but a good budget can be a life changer. Happy budgeting!