Budgeting – it’s not the most exciting topic I know, but it seems like something that a lot of us want to do but don’t. It’s just one of those things that we love to make excuses for – excuses include: I don’t have the time, I’ll start next month, and I’ll be poor forever so what’s the point. For some people, budgeting connotes frugality, lack of fun, and “not living life”. I speak from personal experience. Many times, when people hear that I budget they automatically assume I live like a hermit who gave up on all things fun to save for the future. If I’m being honest I thought all the same things. Even when I first started budgeting I had no idea why I was budgeting. I just budgeted because it was the adult thing to do. What I came to realize is that budgeting is a wonderful tool that allows you to plan the life you want to live. No, this doesn’t mean that with my salary I can suddenly live it up like I’m Kim Kardashian and just casually decide to buy gold plated toilets because I think they’d make my place look rad (btw she totally did this), but it means that I can spend my money based on MY pre-set priorities. And whether your priorities are to save aggressively and retire early or to live life luxuriously (but within your means), planning ahead means that you should only rarely be surprised by your monthly bank account balances. I want you all to get to this stage, so here’s the step-by-step how to budget guide for those of you who always wondered where your money went at the end of each month.
Step 1: Figure Out Your Take Home Pay
Figure out what you make every month after all taxes and health insurance costs. Whether you’ve been working for a while now or are just about to join the workforce I recommend playing with a Salary calculator to see how factors such as state of employment, filing status, 401k contributions, and number of allowances affect your net income. This net income is the amount you have to budget each month – aim to never spend above what you make. Exceptions include events and items you’ve been saving up for such as vacations or gifts.
Example: Single, 1 allowance, Salary of $50,000, State of Arizona
Scenario 1: No contributions to a 401k whatsoever. Net pay = $1,523.57 Bi-Weekly
Scenario 2: 10% of Salary deducted for 401k. Net Pay = $1,372.80 & 401K = $192.31.
Did you notice that even though your net pay is less for Scenario 2 the total amount you receive is actually $41.54 more than you receive for Scenario 1? Why? Because contributing to your traditional 401K lowers your taxable income. Both the federal and state taxes are smaller in Scenario 2 because the 10% 401K contribution lowers your taxable income by 10% – in this case you’re being taxed based on a gross income of $1,720.77. Think about these two scenarios when you’re thinking about starting/increasing 401k contributions!
Step 2: Create a Loose Budget & Spend Tracking
If you have absolutely no idea where you spend your money you need to start off by tracking your spending for at least a full month. General rule of thumb is the 50/30/20 rule which allocates your after-tax income to 50% necessities, 30% to lifestyle, and 20% savings – more on this below. Just use this to get started – if you haven’t started saving at all, a 20% allocation might be too aggressive so start smaller at maybe 10% and focus on getting into the habit of tracking your spending.
3 options To Track Your Spending
- YNAB is my favorite budgeting tool and I’ve tried a fair number of apps and excel. It has pretty graphs and trend reports for spending, net worth changes, and an income vs expense breakdown. Also, it only allows you to budget money you actually have and it’s very flexible. There’s an option for bank syncing but I personally like to manually enter my expenses since it keeps me more aware of my spending and I’m low key paranoid of sharing bank info.
- The biggest drawback is the fact that it is not free. The first 34 days are free (if you’re a student you can get an entire year for free) – then it’s about $6.99/month billed annually at $83.99. Can I get the Honda civic of budgeting? Sure, but when you still have a sibling with an active college email (thanks Julie) you’re going to take advantage of being able to use the Tesla of budgeting for free. We’ll see if I actually continue after the free year… probably yes because it’s so awesome.
- Mint is probably one of the most popular budgeting apps out there. You link all your accounts to it and it automatically tracks your spending for you so if you want to start off with minimal effort Mint is a good fit. The biggest plus is that it’s FREE and they put a lot of effort into securing it. BUT because Mint is automated, it’s easy to set a budget and forget to actually track to it, so push yourself to be diligent.
- You can use plain old excel/google sheets as a low frills solution to budgeting as well.
- You can make it fancy or simple – look at budgeting apps for some inspiration. Maybe this can be your learning excel project. Include some of these basics: Months, categories (Net income/Gross income, taxes (optional), Necessities, Lifestyle, and savings), sub-categories (Rent, student loan, insurance, groceries, etc.), total monthly spend, and Net savings/loss.
- Reddit users have made great excel budget sheets you can copy – Link here. You can even use Google’s very simple and free budget sheet.
3 General Categories to Track your spending
Necessities – These are things that need to be paid.
- Many of these costs are immediate obligations such as: Rent/mortgage, Insurance, car payments, groceries, minimums for loans/other debts, utilities, and other bills.
- There’s also less frequent expenses such as medical, auto maintenance, toiletries, etc.
Lifestyle – Think of these as nice to haves but not essential. If things are looking rough, items from this category should be trimmed first.
- This can include a wide range of expenses such as eating out, shopping (if you’re replacing basics such as underwear and socks – I give you a pass), gifts, vacations, gym (unless you’re homeless and rely on a gym for showers), concerts, bars, things that would fall into miscellaneous “fun money”
- But Angela I NEED all of the above things – naww you probably don’t, but more on that later.
Savings – This is for future you, whether that’s you in 6 months or you in 40 years. Below are some examples of what is included as savings.
- Contributing to your Emergency fund via a high interest savings account of course
- Retirement accounts such as 401K and IRA
- Additional payments towards any debt
- Regular brokerage account if you’ve already maxed out your retirement accounts (you should really aim to max out retirement vehicles first!)
Step 3: Assess Your Spending and Create Some Realistic Budget Goals
Now that you’ve been tracking your spend for a while it’s time to assess your spending and make budget tweaks. Warning! This may require you to face some hard truths. The important thing is to not let disappointment or feeling bad get in the way of you working to get to a better place. If you are terribly unfit, feeling bad about it is not the solution – the solution is to take action. This may mean stopping bad habits and starting new, healthy habits. It requires dedication, discipline, focus, and patience. It also requires you to make realistic goals. Push yourself to a reasonable degree but don’t expect to go from flab to abs in a week – you’re just asking for failure. Okay! Let’s move on to the fun of assessing your spending…
First question – are you spending all or more than your income?
Do you feel like you’re living paycheck to paycheck? This might be a hard truth to swallow but maybe it’s not a salary issue, maybe it’s a spending issue. If you feel like you’re living paycheck to paycheck but are living by yourself in a pricey apartment downtown or are spending $$ on eating out, shopping, traveling or any other nice-to-have-but-not-necessary things then I’m sorry to say but your paycheck to paycheck situation is a spending issue. Of course, I’m not saying that this is the case for everyone, but sometimes we don’t like to face uncomfortable truths that involve ourselves. Watch this somehow hilarious and sad College Humor video then think about who you more closely resemble.
Are you consistently carrying a credit card balance? If so, you need to work on slimming down your spending in the lifestyle or necessities section. “But Angela you said I can prioritize the things that are important to me!” Yes, but with the caveat that you are living within your means. It may not seem like it, but if you are constantly carrying a credit card balance or even worse, increasing your credit card debt month after month then you’re in denial of the fact that you’re not Kim Kardashian. Please stop looking at those gold-plated toilets and focus on paying off the first 4 you’ve already bought. You can’t make any significant strides forward with your personal finance when you are constantly being weighed down by your high-interest credit card debt. Make paying off all your credit card debt your personal finance goal #1!
What does your spending tell you? Numbers don’t lie. Is your spending aligned with your priorities? Maybe you’re not a Kim Kardashian wannabe, but never realized that you’re spending X% of your net income on shopping, bars, eating out, etc. What is the break-down of your 3 major categories? Are you satisfied with these allocations or should you re-align them?
Which person do you most closely resemble?
I have nothing against spending money on recreation or on necessities – I mean the Model American spends money in those categories. But living like Ms. High Maintenance and Mr. Party Animal means a life of living paycheck to paycheck, indefinitely. I don’t know about you, but living paycheck to paycheck with little to no financial breathing room sounds terrifying.
If your spend report shows that you’re misaligned with your priorities and financial goals you have to take a look at where you want to trim from and add to. It’s important that these adjustments are realistic. I mean I don’t expect to suddenly go from flab to fit in a month after neglecting healthy eating and consistent work outs all my life. So if you’ve discovered that you’ve been spending $700/month on eating out and want to work on getting that spend down don’t start by budgeting eating out spend down to $100/month. Maybe start with a $500/month eating out budget and some low-level meal prepping – if it goes well, try to get that eating out budget lower. You can then take that extra money and put it towards funding your financial breathing room and/or save up for that vacation you’ve been dreaming about.
Step 4: Re-assess and Adjust Your Budget Every so Often
Your life is always changing – you might get promoted, move cities, get married, find new hobbies, etc. So with all these changes should come new budgets with new goals and new priorities.
Alright! Those are my steps to get you started with budgeting so there’s no more excuses for delaying that budgeting lifestyle. I’m not saying it’s easy but from personal experience it’s been very eye-opening and rewarding. Don’t live life by constantly being surprised by your bank account – live it according to your priorities.
Below are some actions you can take for a few popular situations:
Situation 1: You are swimming in credit card debt
Stop using your credit card – at least temporarily. “But the points Angela the points!” I get you man, I love my credit cards and got a lot of great points off of them, but you know what’s better than getting cents on the dollar? Being credit card debt free, because this means that you can save hundreds maybe even thousands of dollars by not paying any more interest payments.
Think of when you want to be debt free by and calculate what you need to pay every month to get there. This may mean cutting back on your other priorities temporarily, but remember this is for future you to be able to comfortably contribute to these priorities guilt free.
Make payments more frequently. You know what feels less painful than 1 lump sum payment at the end of each month? 2-4 smaller payments paid out more frequently. Schedule credit card payments (try to be aggressive) to align with your paycheck period so that you take away the temptation to overspend. Your goal is to have ZERO credit card debt carry over every month.
If it’ll take a while to pay off your credit card debt and you have good credit you may want to consider opening up a promotional credit card with 0% APR and no balance transfer fee like Chase Slate. It will allow you to be able to aggressively pay off your credit card debt without having to deal with interest payments for 15 months. Remember to always read the terms of your credit card closely.
Situation 2: You realize you eat out way too much
Maybe you were like right out of college Angela who ate Chick-fil-a every morning, tacos every lunch, and ate out every other dinner. You’re spending hundreds of dollars on eating out but you realize it’s not worth it, and after a month you can’t even stand to look at tacos or Chick-fil-a for a while. So what do you do? Well you decide you’re going to try and meal prep for the first time ever! Take baby steps – maybe prepare only a few easy to make meals like spaghetti, sandwiches, salads, or even just small snacks that prevent you from buying those afternoon chips every day. This is just from personal experience but meal prepping for work days allows me to eat out on the weekends with zero guilt and makes eating out a little more special.
Situation 3: Your savings are abysmal and you want to grow it
Use the credit card tactic – schedule automatic transfers! Determine how much you want to save every month and then just save it! You can do smaller weekly transfers or larger pulls that are timed with your paycheck period. The goal is that this becomes so normal that you forget what your actual net income is. You’d be surprised at how normal it could feel by just tricking yourself into thinking you’re making $XXX less per month. Imagine randomly checking yourself out in the mirror to find that you now have a six pack. Yeah, this doesn’t happen in real life… but with automatic transfers it’s possible to get that six-pack savings account without really realizing it. You can find yourself randomly checking out your savings and thinking danggg savings when did you get all those gains?!
Another pro tip, if you haven’t done this already, open a high interest savings account separate from your checking’s account. The temptation is real when your savings account is linked with your checking account. All that extra money just taunting you and, in your mind, wanting to be spent. Yeah man, you want to get that seductress out of sight and out of mind. A separate savings account makes this temptation less available since it would take extra effort and a few days to transfer funds over. Also, since there should be a lot of less activity happening you’ll probably look at your separate savings account less often than your checking account. The high interest payments are an added bonus. Read the Build an emergency fund section of my previous post for a few banks that offer high interest saving accounts.