How To Budget Your Money: A Step By Step Guide
If you’re a fan of money (of course you are!) then budgeting your money will probably become your newest obsession.
Pretty bold statement, hey? Like who the hell wants to fill out spread sheets and do all this thinking?
But get this:
Proper budgeting gives you some sick ass pleasures in life. It lets you watch your savings account accumulate large sums of money and actually leaves you money to buy rounds of drinks on those unplanned weekend nights.
When I get paid, I get damn excited. It means I get the privilege to jump into my online banking and transfer 50% of my paycheck into my “house down payment” fund. I can do this because I have carefully created a monthly budget plan that fits my short and long term goals.
And today, I want to show you (step by step) how to create your own budget that works.
You’re probably here because at the end of the month, you don’t seem to have much money left over…. if any at all. Or maybe you want to buy something BIG, like your first home, a wedding, or that sick red Jeep Wrangler.
Whatever your reason, the first step to creating a budget is to truly understand what a budget is.
What Exactly Is Budgeting?
Budgeting is the art of allocating your dollars effectively to the things that matter to you the most.
Let’s say you have 2 siblings and you only have 1 slice of pizza to give to either of them. Which one do you choose?
Well, you’d probably cut the pizza in half so each of them get’s a fair share (unless you hate one of your siblings lol). Fairly easy deciding how you want to allocate the pizza, right?
But when you need to decide how much money to put into groceries, bills, loan payments, and random happenings like last minute golf invites, things get a little muddy… don’t they.
If you’ve been fussed with keeping everything on track, keep reading on. I’ll show you quick and dirty ways to create a budget you can stick with.
Let’s get into it.
Creating A Budget
The First Rule Of Budgeting Your Money Is…
So the first rule of budgeting is this: Create a budget that compliments your financial goals.
Sounds about as sexy as Stephen Hawking. But it’s incredibly important. Your financial goals will dictate exactly how much money you spend on everything in your life.
How do you do this?
If your main goal is to save money to move out of your parents basement, you will allocate a heavy amount of money into your down payment fund. If your goal is to save money for education, then a large part of your income will go towards that.
You’ll get examples of “how much” to spend and where shortly.
How Much Money Should You Be Spending In Each Category?
There is the 50-30-20 budgeting rule (which gives you a reference to start from).
This rule says:
50% of your income goes towards fixed expenses (rent/mortgage, utilities, food, bus pass, gas, etc). Basically, anything recurring that you expect to pay monthly. These are like hard costs that are pretty predictable every month.
30% of your income goes towards variable expenses (drinking, movies, gifts, parties, clothes, concerts, etc). Anything that isn’t overly predictable. Kinda like fun money, to keep life sane.
20% of your income goes towards financial needs (car payments, loan payments, credit card payments, saving for a house down payment, saving for a car, building an emergency fund, etc).
The 50-30-20 rule is a good guideline to give you an idea of where your money can go. It’s a very “average” guideline for your average mid life person.
There’s a high chance it wont suit you, though. Because, in my highly awesome opinion, you need to focus more of your dollars towards saving/investing.
I believe life is about living large. It doesn’t have to mean buying Yachts and living in mansions. But it absolutely means having money to create the FREEDOM to choose the things in life that makes you happiest.
That could be buying million dollar homes. It could also mean having lots of free time to spend on the most pleasurable things in your life. Like raising lots of children or eating fancy foods around the world.
Whatever your desires, you’ll need money (and probably a substantial amount). A budget that is geared towards savings/investing is necessary to help you get there.
dope tip: to get wealthy as fast as possible, raise your “financial needs” percentage from 20% to 50% (or as high as you can go). Whether you are paying back borrowed money, saving money to buy a home, or investing in mutual funds, you are aggressively reducing debt and/or growing your cash reserves.
6 Steps To Budget Your Money Like A Boss
Budgeting, stripped to it’s bare bones, is this:
Income – Expenses = 0.
This means that all the money you make (and/or receive) minus all your expenses needs to equal to zero.
Let me explain:
The way I create my budget is to have all my money that comes IN to going OUT somewhere. It could go out to a savings account, student loan repayment, or buying gas. It goes SOMEWHERE. There is never any “left over money”.
Money IN = Money OUT.
This way of managing your money is very powerful, because every paycheck you earn will specifically go towards things you’ve already made a budget plan for.
There isn’t the possibly of “having a few hundred dollars” left over that you’ll likely blow on something useless. These little “leaks” are completely covered up with this type of budget.
6 Steps To Managing Your Money Like A Boss
Step 1: Calculate all your Income streams
You want to use your “take home pay” to calculate how much money you make. This is after tax dollars. If you receive any other income, like government grants, child support, or grow a money tree, include it here. This is your total available income.
Step 2: Calculate all your expenses
You can estimate how much money you spend each month if your spending isn’t overly complicated. If you want to get a very accurate picture of how much money you spend, you can first track how much you spend for 1-3 months.
You can do this by saving your bills or simply writing them down with an app like Evernote. Keeping track of everything, from buying bagels in the morning to washing your car will give you the most accurate account of your expenses.
Step 3: Calculate your budget – Are you in a surplus or deficit?
Hopefully, you will have more income and expenses. You are in a surplus and not creating monthly debt. If you’re here, GREAT!
But don’t take a back seat. You still need to create an optimized budget to maximize your financial goals. It’s necessary, because golfing twice a week is better than golfing once a week.
If your expenses are larger than your income, then you are digging yourself into a hole of debt every month. This will destroy you financially. In this situation, you need to do 1 of 3 things:
- Increase your income
- Decrease your expenses
- Do both (increase income and decrease expenses)
I recommend number 3. If you truly want to be wealthy, you absolutely need to increase income. Cutting expenses is absolutely helpful, but nobody ever said they got rich by giving up Starbucks.
Having said that, cutting expenses is the easiest and quickest way to reduce debt and begin building a bank reserve of cash worth talking about.
Where is the best place to cut expenses?
You’ll want to look at two things: (1) variable and (2) fixed costs.
1) Your variable costs is easily the first area you should look at slimming down. Here’s something you MUST keep in mind. Budgeting isn’t about cutting everything you love out of your life so you can actually pay back your loans.
If you must have a Chai Latte everyday, then by god, you get that latte. And you drink the shit out of it.
Budgeting effectively is about putting your money towards the things you LOVE the most. You don’t have to cut Netflix or stop buying Lego, or drinking every Friday night. If you love it, go balls out.
However, your variable expenses that you can live without needs to be cut the hell out. Why spend money on things you moderately enjoy, when you can spend that money on things you REALLY enjoy? Makes sense, right?
So, have a look at your list of variable expenses and identify the things you can let go, or spend less on.
2) Some of your fixed costs can usually be slaughtered too. For example, I didn’t watch a lot of TV and I found it to be a pretty effective time waster. So I called up my Satellite company and cut it. $100 per month saved. BOOM! It now goes towards my Investing account.
Have a hard look at your fixed costs and really ask yourself if you need it. Can it be reduced, or eliminated completely? Along with your variable costs, cutting some of these fixed costs can save you hundreds of dollars a month.
Now, you want to look at your budget again. Does your income – expenses put you into the positive side? Hopefully it’s a yes. If not, then you will need to make some sacrifices in your life. Maybe that Chai Latte needs a little less love.
Your other option is to generate more income. The typical way is to work more hours at work or find a second job. But starting a business or a side hustle is TRULY the best way to make extra money and get wealthy. Something I’m a bit of an expert on, actually :). But that’s a post for another day.
Step 4: Create Your Allocation Ratio
Whether you make more money than you spend or vice versa, this step will be the same. You will need to decide where you want to put your money every month.
This will be different for everyone. If you have a lot of debt, I recommend paying that off as your highest priority. If you have a small amount of debt (or none at all), I highly recommend putting as money as you can towards investing, buying assets, or just savings. Maybe even a vacation fund, too.
I am a HUGE proponent of saving money and investing for the future. I’ve had virtually zero debt my entire life and I’ve always hard large sums of money in my bank account. I can’t tell you how relaxed I feel knowing that if shit was ever to go down, I would have money to ride it out for many many months.
I recommend an aggressive saving plan. As high as 50% of your money goes towards investing/savings. 15% for fun stuff, like going to movies and buying clothes, and 35% of your income towards stuff you need to pay every month, like your cell phone bill, loan payments, utilities, car payments, and insurance.
This ratio may not be ideal for your current situation, but it’s something you can strive for as you get your budget going.
Step 5: Tracking Your Monthly Budget Plan
Your money coming in is typically easy to track. You probably have a good idea of how much money you receive every month without thinking too hard about it.
Your expenses will probably need tracking though. The easiest free way to do this is to use a spread sheet.
I’ve made a list of the best free online spreadsheets you can download and track your monthly budget. Check them out here.
Step 6: Create A Separate Bank Account For Each Category
This step isn’t absolutely necessary, but it works damn well.
Let me explain.
I have a separate bank account specifically for fixed costs, variable costs, and various savings accounts for different things I am saving for. Basically, because I am highly organized, I like separate bank accounts for separate needs.
Here’s how I do it:
I have my “spending account” that I use for things like eating out, buying magazines and clothes. This is my “variable cost” account. It doesn’t matter if I make $1500 or $5000 a paycheck. 15% of my income goes right into here.
My “fixed cost” account is used solely to pay monthly recurring expenses. I transfer funds from this account online to my various utilities and other payments.
I have several high interest savings accounts that I have for specific purchases. Right now, I am saving money for a Jeep. I’m also saving money for another home. And I have a vacation fund, too. I put 50% of the money I make into these savings account (I decide how much of the 50% of income goes into which account based on how bad I want each thing).
I love doing my monthly budget this way because my money always goes into specific accounts for specific purposes. No money is lost in translation or “left over” for me to blow it on wasteful things.
And even if I have a tiny paycheck, my percentages stays the same. The way I budget my money allows the accounts to build up extra money slowly, so during slow income times or high expense times, I can cope.
The Computer Girl
There was this girl I will never forget. It was during back to school when she came into my store to buy a Macbook. I showed here the differences between a Macbook Air and a Macbook Pro.
She’d be using the computer strictly for school and wouldn’t be doing anything more than researching and Netflixing. I recommended the cheaper Macbook Air. It was very clear that this computer was more than enough to fit her needs. She agreed with me, too.
But she still had the dilemma of choice….
Should she buy the cheaper Air or the more expensive Pro? For a (smart) girl who was about to begin graduate studies in Law, I didn’t question her ability to make “real life” decisions.
She rationalized to herself out loud, weighing the pro’s and con’s of both computers. Everything she said pointed to the Macbook Air. She’d look at me as she spoke and I just kept nodding at her in agreement.
But then she said something that completely blew my mind…
She goes…. “Well, I just got my student loans. I’ve got the money for the Pro, so I might as well spend it”.
MY MIND NEARLY EXPLODED!
Here’s a girl, who’d probably destroy me academically, making a flawed judgement a 10 year old me wouldn’t even make.
Why the HELL would you spend money just because “you have it??!!” You do realize you will have to REPAY YOUR STUDENT LOANS (with interest) one day, right?
But she didn’t consider this. It wasn’t part of her thought process, so I gently told her a quick story of how I had a small loan payment when I graduated University, and more importantly, the freedom I had because I was able to pay it off quickly.
I think she got the point of what I was saying.
It reminded me that many people (even super smart ones) can be incredibly financially illiterate. And that many people don’t create budgets. I think most people that don’t have budgets have gotten away with it because it hasn’t truly affected them yet.
Kinda like people who don’t feel the true effects of eating unhealthy. They don’t realize that down the road, when health complications occur, that they’ve been totally messing up for decades.
Don’t let this be you! Be financially responsible right now (no matter your age), and you’re older self will thank you tremendously.
An Example Of A Monthly Budget
Here’s a sample budget:
Let’s say I make $45,000 a year AFTER TAXES. This means I have $3,750 per month to spend.
What you do with these dollars will dramatically impact your financial well being, as you should know by now.
So we have $3,750 coming IN, and $3,750 going OUT every month.
- Let’s say 40% goes towards the house (mortgage payment or saving for a down payment). $3,750 x 40% = $1500.
- Let’s say 20% goes towards investing for the future (Saving for child’s education, retirement funds, building savings, emergency fund, etc). So that’s $750.
- And let’s say 25% goes towards bills, loan payments, etc. That’s $940 (rounded).
- So that leaves 15% on monthly FUN spending, like going to the movies and Starbucks. That’s $560 (rounded).
Home: 40% = $1500
Investing: 20% = $750
Bills/Loans: 25% = $940
Spending Money: 15% = $560
In this example, the ratio of my income is spread out with these specific percentages. Your own situation may be very different. You may have larger loan/bill payments, and will need to increase that category.
Likewise, perhaps you want to save for a home slower, and will reduce that. Or you’re a wild spender and love to spend freely, so your spending account will increase.
However you want to allocate your dollars, it’s incredibly important that you stick to your ratio. Every once and awhile, you can take a “loan” from one of your other categories. Like when the new iPhone comes out and you don’t have enough money in your spending account. Take it away from your house down payment account (and pay it back down the road!)
The cool thing about setting your monthly budget up this way is that you get to see certain accounts grow and grow.
I always love logging into my online banking account to transfer my payday to individual accounts. A little bit every day adds up to big time growth.
So there you have it. How to create a monthly budget with your money.
Do you have any questions on what you’ve read here? Let me know in the comments section below. I’ll be glad to help you create your monthly budget.
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