Budgeting Part 1 – How to Make a Budget

Spending

One day when hanging out around the house, I realized I needed something from the store. I hop in my car and drive to the nearest convenience store. It wasn’t a necessity and I hadn’t budgeted for it but I was out and I figured it wouldn’t hurt to grab some more real quick. It’s not like I wasn’t doing anything else anyway.

I walked up to the counter at the store to pay and pulled out my credit card. Without any thought, I swiped it and walked out of the store. The new item was acquired and I headed back home. 

For Past-Seth this was a normal thing to do… but can you spot what’s wrong with this scenario?

I didn’t stop and think, “Do I have enough money for this?” before swiping my card. 

There’s actually two things wrong with the above.

  • First is not respecting “the gap” as I call it. More on that in part 2 since that’s mindset related. Essentially I was impulse buying, which you’ll quickly learn around here is a big no-no. Intentionality is key. 
  • Second was not sticking to my budget. In all actuality, Past-Seth didn’t have a formal budget. For argument’s sake, let’s pretend like Past-Seth didn’t have a written budget. He may have known how much was in his bank account or not, which is a good idea, but let’s pretend he didn’t because odds are I wouldn’t have really known.

Big mistakes but it’s just one purchase, who cares? It probably wasn’t even that much money anyway. 

Wrong!

When in debt or when saving for a goal you’ve got to be intentional with your money. By making impulse decisions you’re going to find that your money won’t last long at all. Even if you have a high income to mask your spending eventually it catches up or impedes future goals significantly.

Small purchases add up quickly, especially if they’re being bought on credit that’s not being paid off monthly. Not to mention the bad habits we’re allowing into our lives by doing this. One day when you’re debt free and you have your money management under control, you can loosen up a lot more. 

Let’s take a closer look at budgets and see what we can do for Future-You. 

What is a Budget Anyway?

Simply put, a budget is a tool that captures your cash inflows and cash outflows. What is left after you get paid and then pay bills and purchase necessities? That’s the core of what the budget is there for. View it as a guide.

It shows you the big picture of your financial scenario. Ideally it will also take into goals you’ve set out for yourself.

I suggest you make a budget when you begin your journey, especially if you’re in debt. It’s a quick way to highlight low-hanging fruit to optimize and it gives you a target to aim for each month.

If you have $500 left over after everything is taken out, now you know your spending, saving, investing, or giving potential – before you get to the end of the month with that money.

Start before the first of the month and plan to do a month to month budget. Some will find an annual budget too much at first. Plus once you make a monthly budget you can easily make it into an annual one.

I personally budget month to month. The last day of the month I sit down and take 15 minutes to go over what I did well and not so well this past month and then look at my projected monthly income and spending for the upcoming month. 

Note here that I will sometimes use the word “spending” over “expenses”. To me it’s a control thing. Spending to me sounds like something I have total control over. Expense sounds like I don’t much say in the matter. Personal preference.

Think Through Your Goals Before You Start Your Budget

“He that lives upon hope will die fasting.”

Benjamin Franklin, Poor Richard’s Almanac (1758)

I find it’s best to have a clear goal in mind than to randomly try to guess my way through things. Especially when it comes to money. That’s a sure-fire way to spend more money than you have.

Naturally, if you’re in debt, your goal is simply to just get out of debt. Try to be more specific though. If there’s multiple debts, which would you like to get out of first? This has now been covered in another post here.

Say you have a credit card and a car payment. Now would be a good time to decide if you want to pay off your car early, or just simply pay off the credit card and be done.

Another consideration is what to do with your soon to be new cash flow. Once one debt comes off, that monthly payment is now free cash flow and it will need to be allocated.

At the end of each month, you should be able to confidently say, yes I am getting a little closer to the goal I set out in the beginning.

If you are out of debt and are trying to hit a savings or investing goal, this works similarly for you too. Try to get specific on how much you want saved by when.

For any goal, debt or savings, take the total debt and divide it by your total free cash flow. Assuming this number stays constant, this will tell you exactly how long you can expect to pay off your debt or save your cash.

$10,000 goal / $500 a month towards that goal = 20 months.

For savers this is good enough. For those in debt, specifically credit card debt, this number might not be as accurate. That’s because you’re carrying a balance with a very high interest rate. For the time being it will serve as a good goalpost to aim for. For me, it’s very motivating seeing the number of months remaining.

Let’s Make a Simple Budget: In vs Out

The best kind of budget is the one you’ll stick to. Some people prefer pen and paper, some templates, some spreadsheets, and others websites or apps. Whichever way you decide to go with the basic premise is the same. For this example, I’m going to show you how a basic budget looks in a Google Sheet. The same can be replicated in any spreadsheet application.

Start with the cash coming in. List everything out. Most people just have their regular monthly income from one job. But include any cash inflow. If you started driving for Uber, make sure to add this in too.

Next, start making a list of all your spending. Start with bigger items – these are your fixed and some variable expenses that you’re stuck with no matter what. Then, make your way through everything that you know you’ll spend money on this coming month. 

An example of a simple budget I'd used for my clients.

Here is what a typical budget could look like. It’s very simple. At the bottom or off to the side of the income and spending, subtract your spending from your income. This is how much money left you’ll have at the end of the month. Ideally right here you’d have plenty left over to save/invest, and some to maybe give away or spend how you see fit. 

In my example you can see I’ve gone ahead and put monthly and my formulas do the annual for me. It’s good to know how much $50 of coffee a month is annually ($600) for example. This technique of extrapolating things out far into the future is powerful. It can help you decide if you value that as much as you really think you do.

This example leaves this person with over $600 left a month, or about $150 a week. That’s pretty good given they’re putting so much to debts. This extra money will be used as a buffer, to be saved, or put towards the debts at the end of the month. At the end of the month this person would expect to go from $5k in income to $650 roughly. 

Adjust and play with the numbers to simulate different scenarios for yourself. See what would happen if you went into full blown savings mode or if you went wild and tried to spend everything. 

Notice I separated expenses that are infrequent and budgeted them as if I were to pay them monthly. This means when one of those bigger expenses comes up, I ought to have the cash aside for it because I planned ahead. This helps me from getting caught off guard for one off things I usually forget about until they hit my bank account.

What To Do With Variable Expenses?

Fixed expenses are easy to plan for. You know your student loan is $268 a month and rent is $1,300. But what about electricity, groceries, eating out, gasoline or bus/train tickets? How do I budget for also enjoying life and going out or shopping at times? 

For things like electricity, you can look at past bills to estimate what it’ll be that month. I always put +$15 on my electricity and heating bills during peak seasons as a buffer.

For food and gas, these might be harder to know. Take your best guess and as you go through the year, you’ll eventually learn about how much you are going to spend on average. I stray on the conservative side and tend to slightly over-budget.

When it comes to going out to eat or to shop, you’ll have to look at how much you have left at the end and then allocate some to those if you want. You don’t have to but if you crave a more balanced approach then make sure to plan for it. 

My rule of thumb is this: The more you’re in debt (especially credit card debt), the less discretionary spending you ought to be doing. The focus ought to be instead on paying down debt and spending money on leisure or restaurants or whatever at a later date.

If you’re not in debt but you also need to save, prioritize as necessary. I’d still try to keep it to a minimum until the goal is reached. I recognize for most it won’t be $0 most months and that’s OK too. You’ve got to start somewhere and spending money on yourself isn’t inherently bad – but it’s not great when you’re up to your eyeballs in debt.

What if My Net Number is Negative?

This could easily be the case if you’re spending more than you earn. If this is the case for you you’re in good hands.

Know that something will have to give. You’ll have to either cut back on some spending or increase your cash inflow.

That could be from borrowing money from a family member or friend (try to avoid if possible – only as a last resort), moving money from your savings if you’ve got any, or worse case: using your credit card to borrow it (big red flag!). 

Most likely if you’re in this scenario month after month, you’re using a credit card to cover your spending. The blog name isn’t just to be funny or clever – in this instance you’ve got to stop spending in some aspects or else you’re going to get eaten alive by interest.

The reality is that this is a pretty bad spot to be in. Take a deep breath and realize that you’ve found a good resource and you’re working to remedy the situation. Know that it will improve given the right actions and enough time.

This is why I do what I do – to help people who were in the same scenario I was in all those years ago. I get it if this is your scenario. If it is know you’re not alone and this is unfortunately very common. But common does not mean normal! So stick around, finish your budget, and let’s learn together. Let’s build habits, stick to our plans, and make some progress together. It’s tough, but totally possible to reverse course.

Budget Self Review

At the end of each month make sure you’re sitting down to review how the month went. I won’t touch on this much now since this post is about making a budget primarily. However, I wanted to quickly mention that self reflection is key to improving!

Take the time to look over your spending and see where your strengths and shortcomings were. Now when you go to plan for the next month, you can refine some of your goals and aims.

Not So Bad, Right?

That’s really all there is to making one. You can write them down on a piece of paper too. When I first started down this path I was writing them on sticky notes – no kidding. It quickly got out of hand so I bought a proper journal. I then moved to a spreadsheet so the formulas could auto-update numbers for me as things change month to month. The example I provided above is very similar to my old template.

Other Useful Tools in Addition To Your Budget

Besides my monthly budget, what other tools do I use? I try to keep money management simple. This is what I’ve found works for me. Once these things are set up, maintaining them is a minimal time investment that I find brings me a lot of value.

  • My financial goals are physically written out in a journal
  • My budget is in a spreadsheet through Google Sheets (so I can access it through my phone or PC and make quick updates)
  • For investments, I have Fidelity doing everything for me
  • A net worth tracker that I update monthly
  • A simple FI progress chart

While it may take a little bit of time to get these things up and running for you, it’s worth it at the end of the day. You can use as much or as little as you want. As long as you’re meeting your goals it doesn’t really matter.

The most pertinent thing that I listed for newcomers to financial and money management though is the budget. It’s also what I get the most questions on since a lot of people have trouble coming up with one and then also sticking to it. The rest I have will come naturally in time as your wealth grows – and if you’re consistently hitting your goals, it will.

Only Half The Battle

Just having a budget is only half of the battle. Congrats on getting there! Next you’ll want to focus your efforts on actually sticking to your budget. That’s the goal right? We plan and we try to hit our plan. If we stick to our plan we will have success. Win!

If we miss then we take note as to why we missed and by how much. We recalibrate our plans next month, and try to hit it again. 

Something I will touch on soon in more detail is this formula for success.

Action + Consistency = Success

Think about what this means for your financial situation. Actions are your choices day in and day out to spend or not spend. Those actions fill your budget. Consistency would be making the correct decision multiple times in a row. That’s financial success to me once it’s broken down. 

The reality is that it can go both ways. If you are consistently taking the wrong actions you’re going to end up further in debt.

What Will Having a Budget Do For Your Financial Situation Now?

For me, it was a confidence boost to be able to see, understand, and know exactly where my money was going every month. I felt like it gave me a lot more control over my money.

It inspired me to try to make more money and to try and cut back on waste.

Having a budget is just the beginning. Sticking to it consistently is what’s going to create huge changes in your life. But you can’t make those changes without the right tools (the budget). Next week part 2 will be a seriously massive post covering sticking to the budget.

An investment in knowledge pays the best interest.

Benjamin Franklin, The Way to Wealth (1758)

Here are ways to support, stay in touch, and work together:

I look forward to speaking with you and helping guide you down this life changing path.

In health and in wealth,

Seth