How to Budget the right way & Change your Life
Let’s create a budget! It’s about time. This will be a step-by-step guide on how to budget money for beginners. How many times have you run out of money before the month has ended? How many times have you wondered, “What the hell did I just blow my paycheck on?!” If these statements resonate with you, then grab a pen, paper, and calculator, and let’s get to work. I’ll educate you and walk you through how to budget your money. It’s time to change your life, girlie!
Budget
First, let’s demystify the scary word “Budget”. A budget is a plan for your money with you in the driver’s seat telling it what to do. People tend to fear and steer away from budgets because they feel that it will put handcuffs on them or it will not allow for spontaneity. However, the opposite could not be more true! A budget allows you the FREEDOM to PLAN and anticipate your expenses and needs. You are in control and you direct where your money goes. Hopefully, this has given you a bit of a chance to reframe your thoughts around budgeting and we can get to work on building your budget. There are different budgeting methods (i.e. 50/30/20), but the one I always recommend and find most effective is a Zero-Based Budget.
A zero-based budget is where you assign every dollar of your monthly income a job (or an expense) until you have a $0 balance (no more income to assign). So after you’ve assigned each dollar of your income a job, you should be left with a $0 balance (I’ll show you what this looks like shortly). I find this to be the most effective method because it forces you to plan ahead and to be specific about how you’re going to spend every dollar of your money every month.
how to budget your money:
1. What are you spending you money on?
In order for you to plan your month you NEED to have a deep understanding of what you’re actually spending your money on. This is always the scariest part of getting your personal finances together. This is typically the step where you have your “Oh Sh*t…” moment, because you’ll finally see the financial impact of all your potentially reckless spending. I find that people (myself included) would rather live in blissful ignorance than see the full picture. Trust me, the truth is less scary than what you have built up in your mind. And if it is scarier, the good news is that you have the opportunity to change that starting today! If you don’t know what you’re spending your money on, you’ll continue to fall into the trap of not knowing where your money is going. So, let’s end the cycle girlie.
Fixed Expenses
Log into all of your accounts (bank and credit cards) and pull the last 3 to 6 months of statements or download the excel from your bank (if you’re a nerd like me, this is where you can geek out. I would recommend categorizing all your expenses and creating a pivot to visualize where all of your money is going) and make note of all your fixed expenses. Fixed Expenses are your expenses that occur every month with the relative same amount (e.g. rent or mortgage, car payment, electric, insurance, etc.) – I say relative same amount here because you can have variable fixed expenses which mean these expenses occur every month, but the amount may vary depending on usage (e.g. your electric bill, gas or water bill). For these expenses, I take an average of these monthly amounts and use that figure to budget each month. I would recommend including your “high” months (e.g. winter when you may have the heat running for longer periods of and so your gas bill may be higher or the summer where your water bill could be higher due to watering your lawn and plants) into your average to ensure coverage in your budgeted amount for electric, gas, or water bill estimates. For your fixed expenses only list the bills here that are NECESSARY to cover your basic level of living. Your gym membership is not a basic necessity.
These are the expenses I consider to be fixed:
Once you have listed out all of these expenses as well as their due date (I would recommend confirming the due date from the company and not just the date that shows up on your statement as you may have paid early or late and you need to know when things are due in order to plan when you can pay these bills. You can refer to my post on Paycheck Planning on how to do this).
Debt
From here, you can move on to listing out your debt (any money that you owe) obligations. You can also consider your debt payments fixed in nature as the amount you owe likely won’t change each month and are paid at the same time each month. I find it incredibly important to break out your debt vs. all of your other expenses because this is an area that you should be tracking and focusing on when you’re working on eliminating debt.
Debt payments can include:
Savings
Next, put down how much you’re saving each month. You may or may not be currently saving. If you are, great! If not, we’ll get you there girlie. Put down how much you’re currently putting away towards your savings goals and/or your investments.
Your savings could include buckets/accounts like:
Variable/Remaining Expenses
Finally, list out your variable/remaining expenses (e.g. subscriptions, groceries, gym memberships, housekeeping and eating out). Expenses that have variability (e.g. groceries or gas) use the average method I detailed above to estimate your monthly cost.
At this stage in the process do not cut anything just yet. Aside from the expenses I recommended to use estimates, you need to be able to see EXACTLY how much you are spending each month as it currently stands.
2. how much money are you bringing in?
You have to know how much money you are making. You’d be surprised at the amount of people who don’t know their annual salary or how much they net each month. This isn’t meant to shame you, but YOU NEED TO KNOW HOW MUCH MONEY YOU MAKE. How would you know if your employer made a payroll mistake if you do not know how much money should clear your bank account? Living in blissful ignorance does not help you. A Money Girlie always knows what she makes and how much money will hit her account. So, I cannot stress this enough, knowing how much you make is the first part of the equation therefore, you need to know.
So, if you do not know or maybe you do but you need a refresher, go ahead and pull your most recent pay stubs. If you’re budgeting for a household, be sure to include your partner/spouse’s income as well. If your pay is variable (e.g. you’re paid on commission or hourly) pull at least 6 months worth of pay stubs and use the average – if there is an anomaly like you had a particularly great commission month, I would exclude that as it may skew the average. I would recommend always using the lowest amount rather than higher in order for you to plan your expenses accordingly. If you need help understanding how to read your pay stub, I have a blog post about that here.
Make note of how much you net each month and when you’re being paid. This means knowing how much money you clear less pre-tax deductions (e.g. 401k, healthcare, etc.), tax withholdings, and post-tax deductions (e.g. insurance). As well as when/how many times you’re being paid monthly. Some employers pay weekly (which means you receive 4 paychecks a month), bi-weekly (every other week), twice a month (typically 15th and 31st), or monthly. Take the amount you cleared (what goes into your bank account) and multiply it by the pay frequency (e.g. if you get paid bi-weekly multiply that amount by 2) and that is your monthly income.
3. YOU NEED TO SPEND LESS THAN YOU MAKE.
This is the step where you see the end result of how much money you clear by the end of the month (i.e. your income less expenses). Take your monthly income and subtract your expenses including your savings. The remaining balance, if any, is how much you net or clear every month after paying your bills.
This may be the second time in the process where you have your “Oh Sh*t…” moment if you landed in the red (i.e. your expenses exceed your income). This is the part in the process where I recommend you go back through your expenses. This is where you begin to have those hard conversations such as how uncomfortable you’re willing to get in order to get your finances back on track. Look no one wants to be uncomfortable or give up daily conveniences that make life easier, but Dave Ramsey says this quote that always sticks with me whenever I have to make these hard decisions, and it’s to “Live like no one else so you can live and give like no one else”. What this means is that you must be willing to live like no one else temporarily in order for you to have the ability to live like no one else in the future.
You need to spend less than what you earn. I know this is not a hard concept to understand, but it can be the most difficult to implement, because you’ll need to make some hard decisions on what to let go. Trust me, I’ve been there. My husband and I have struggled with this for the longest time. We always thought, “We make good money…We can pay this…We can do that…” As a result of our overspending habits, we found ourselves feeling constantly broke, living paycheck to paycheck and unable to build wealth. It didn’t make sense to us, because we did make a good living. We should have been able to build a lot of wealth. But as I did this deep dive into our finances, I came to the sad realization that while we were making more than enough money, we were also burning through it, just as fast. So, the moral of this story is, until you put spending less than what you make into action, you will always have a difficult time reaching your financial goals (e.g. being debt free, saving, investing, etc.) – and trust me, nobody wants to be a broke girlie.
So, with that piece of wisdom, I recommend that you start with your variable/remaining expenses first. Comb through your subscriptions. More often than not, people continue to pay for subscriptions long after they’ve forgotten about the service (these add up!). I mean, do you really need all of those streaming services? Get to cutting, girlie. Next, go to the conveniences that are nice to have, but not a necessity. This could be housekeeping, food delivery subscriptions, landscaping or getting your nails done. Cut them out. Keep combing through each line item until you pull yourself out of the red.
I also recommend that you perform this exercise even if you’re not in the red. It’s a good habit to review your expenses periodically and understand what you’re truly using and what’s no longer necessary and cut them. The more money you can free up, the better you can use those funds to service your debt, increase your savings, or even fund fun things like travel or shopping!
4. zero it out.
Finally, let’s get to the essence of what zero based budgeting actually is. By now, you’ve done the hard work. We have a handle on what we’re spending, we know exactly how much we’re bringing in each month, and we know what this nets out to be. As a refresher, zero based budgeting is the method in which you plan to give every dollar of your income a job until you end with a $0 balance.
As we did above, list your expenses in categories. Here are a few examples of categories and the expenses that would go into them. Feel free to create more categories that fit your lifestyle:
Detail out each expense (or bill) that falls under each category using the information you gathered above. After categorizing all your expenses, calculate what the subtotals are for each section and total them up against your monthly income.
For example, if your total expenses are $2,500 (I know, I know this is totally unrealistic, but for simplicity sake bear with me) and your monthly income is $4,000. That means you have $1,500 remaining to “spend” or allocate. It is critical that you don’t just stop here and think, “Great! I have a $1,500 buffer for the month!” I used to think this way and it’s a sure fire way to overspend. Every dollar NEEDS a job. There should be a specific purpose for every dollar you spend. This doesn’t mean that by the end of the month you have $0 dollars in your account. You will create a buffer for yourself in the form of a “Miscellaneous Category” that will remain in order to bucket those small miscellaneous expenses that occur throughout the month (e.g. diapers, body wash, etc.) or if a bill comes in higher than expected.
So what do you do with remaining balance? If you have debt, increase your monthly allocation to pay down your balance. So in this situation, if your financial goal is to become debt free, then prioritize allocating as much as you can towards your debt. In this example, I would recommend allocating $1,000 of the remaining balance towards debt. Deducting the $1,000 from the $1,500, you are left with $500 to allocate. If one of your next goals is to have 3 months worth of expenses (e.g. $7,500) saved up for your emergency savings, then, I would prioritize this next by allocating about half of this amount to savings ($250). Now you’re left with $250. This is where you can play with this a little, at this point if you want to be super aggressive, you could allocate a bit more to debt and keep the remaining balance for your miscellaneous expenses or if you know that your miscellaneous expenses add up, keep a healthy budget there to ensure you have that buffer. After this, you should have a $0 balance and this is what it means to have a zero based budget. Again this is a simplistic representation of how you could budget your money for the month, but we all know that the reality is a bit more complicated than this.
This is where you need to do some reflection to anticipate what your needs are going to be for the month. This can take some practice and it won’t be perfect the first time around, but the more you do it, the better you’ll be. I usually start by looking at a calendar and seeing if there are any significant events (Holidays, birthdays, outings, taxes, etc.) that I’ll need to account for. For example, if it’s December, Christmas comes at the same time every year, so it shouldn’t be a surprise and this shouldn’t be an excuse for overspending. Plan for it and by adding a line item in your budget to accommodate the purchasing of gifts or any additional expenses that come along with Christmas. Be reasonable and only plan to spend what you can actually afford. Don’t try to keep up with the Joneses. This is the time to create some boundaries and let family/friends know what you can or cannot do. In this situation, using the example above, I would recommend cutting back on your miscellaneous expenses as well as your additional debt payments or savings this month and use those funds to allocate towards these one-time expenses.
Also, life happens. There are surprise expenses that pop up that you would not have been able to predict. If you find yourself in one of these situations, this is where you would take the opportunity to make adjustments to your plan. Your budget is not carved in stone, you can always make reasonable adjustments to accommodate emerging priorities. This does not mean you overextend yourself. You will need to look for areas where you could reasonably cut back (e.g. eating out, additional debt payments, etc.). If you are in a situation, where a surprise (e.g. your car breaking down) can literally break you for the month and there’s no wiggle room for you to cut back on anything else to accommodate the expense, this is where you would reach for the emergency savings (with the understanding that you will need to plan to replenish this again).
5. KEEP TRACK.
Throughout the month you should be tracking and monitoring what’s coming into your bank account, what is leaving and how much you have remaining. Again, Paycheck Planning (aka cashflow planning) is a great way to ensure you won’t end up in the red throughout the month. I have a blog post here on how to implement this system into your Monthly Budget Planning Process. It is considered good personal finance hygiene to know what is happening in your accounts. This keeps you in control and on top of your money. Constantly monitoring your accounts throughout the month also helps you identify if there are any unanticipated charges that go through. You should never just rely on your bank to identify fraud. It is your responsibility at the end of the day. Spend time with your money. I typically allocate about an hour each Friday (aka Finance Friday) to review spend, pay bills, and ensure I’m staying on plan.
Let’s Recap!
If I haven’t said enough throughout this LONG blog post, I’ll say it again. You NEED A BUDGET. If you’re tired of feeling frustrated and living paycheck to paycheck because you’re not in control of your money; now is the time to channel your inner Money Girlie. You need to take action and get in control of your personal finances. I know it won’t be easy and you may feel a little discouraged, but I promise you that you won’t regret it. You won’t ever regret doing something that will change your life and make it better. I’m here to encourage you and to help you. Now get to work, girlie!
Feel free to drop a comment with your questions or send me an email directly!
