Budgeting Basics – 5 Steps to Keep it Simple!

Budgets get a bad rap. Pinching pennies and eating ramen…. who wants to sacrifice when they can enjoy exotic vacations and 5-star restaurants? Don’t be so fast to give into the negative hype without giving it a legit try first!

The truth is many think the dreaded “B” word will make them restricted from living that effortless fun-filled life they see posted on their friends and family’s social media. But what if you could have your cake and eat it too…at least in time? Wouldn’t that be great?

Enter Budgeting! Unfortunately, like many personal finance topics in general, creating a budget isn’t something many of us have had the opportunity to learn correctly prior to being in the position of needing it. If only we were given these simple blueprints in high school to set our brains on the correct path…Nevertheless, you are here now to make the right choice to actively manage your finance future!

Budgeting is the tool that would allow for just that opportunity. Set the intimidation aside and put on your planning cap to follow along and give yourself some structure and the ability to make important spending decisions when the time arises because you’ll know exactly what you are capable of financially.

Budgeting doesn’t need to be overwhelming, just Keep It Simple!

Download your FREE Primitive Budget spreadsheet HERE.

Step 1 : Identify Your Total Net Monthly Income From All Sources

Your net monthly income is the money received each month from your income sources AFTER deducting taxes, and other payroll benefits (401K, FSA, HSA, etc..), if applicable. Be sure to include all sources of income in this assessment so you can accurately gauge your net monthly income.

If you do not have a steady salary, work on commission, or just have varying/irregular paychecks from month-to-month due to benefits and/or other staggered deductions, use the minimum monthly income value for purposes of this calculation as it will help plan your budget for the worst-case scenario.

Tip: List the income you’ve received over the past 2-3 months and circle the lowest paycheck within that time. This will become your starting point and amount used to budget for your top priority monthly expenses.

Step 2 : Identify Your Total Monthly Expenses to Track Your Spending

Monthly expenses include both “fixed expenses” and “variable expenses”.

• Fixed Expenses are static, regular, and never change such as: rent/mortgage, car payment, utilities, cable/Internet/TV, insurance, etc… These are typically expenses that you are not able to cut back on as they are necessary to maintain your essential living. Being able to identify them will help in prioritizing your income to allocate money to these expenses first.

• Variable Expenses are costs that can change from month to month depending on the need. These include items such as: Groceries, Clothes, Gas, Entertainment, Household/Maintenance, Daily Starbucks Coffee *ahem*, etc… These types of expenses can be adjusted to cut back when necessary.

Determining your fixed & variable expenses can be as simple as looking at your credit card statement and receipts to better understand your monthly expenditures. Once you have a list of all the things you are spending your hard earned cash on, you can then categorize them by expense type, i.e. Fixed vs. Variable, and then ultimately prioritize this list in order of most important and necessary to least important wants.

TIP: Recording 2-3 months of spending will give you a good estimate of your monthly expenses. It may not be easy to remember, but try to keep track of your daily spending habits, use what you have available such as good ol’ pencil & paper, spreadsheet (Excel, Google Sheets), or a convenient Smartphone App such as: You Need A Budget (YNAB), Mint, Personal Capital, Good Budget, Pocket Guard.

Knowing how much you need to cover all your expenses is critical towards your financial security and independence.

Step 3 : Set Your Short Term & Long Term Target Goals

You’ve done good so far! Now before your go diving into all the data you’ve compiled, use this step to build some financial savings motivation and create a list of goals, both short-term & long term.

Short-term goals should be achievable within a year. Long-term goals, such as saving for a house, retirement, or your child’s college education, may take years to reach. Keep in mind that these goals don’t need to be set in stone, however, identifying your priorities before you start planning a budget will help keep the right mindset for attaining them. For example, it may be easier to cut spending if you know your short-term goal is to eliminate credit card debt.

First think of what you might want to save, i.e. maybe you’re getting married, planning a trip, or buying a house. Then figure out how much money you’ll need and how long it might take you to save it.

Examples of Short-Term Goals (1–3 years)

• Emergency fund (3–9 months of living expenses, just in case)
• Vacation
• Down payment for a car

Examples of Long-Term Goals (4+ years)

• Down payment on a home or a remodeling project
• Your child’s education
• Retirement

Tip: Setting a small but achievable short-term goal for something fun, yet large enough that you may not easily have the cash on hand to pay for it, such as a new smartphone, camera, or  laptop, can give you a psychological boost that makes the payoff of saving more immediate and reinforces the habit, especially when you can enjoy the fun or claim the reward to which you have worked so hard to achieve!

Step 4 : Subtract Your Monthly Expenses from Your Income

Once you’ve laid out your income and expenses, you can subtract the expenses from the income to determine whether you have any money left over. If you do, GREAT! There are many things you can do in this scenario to either save it or allocate it for another purpose, hopefully one where your money works for you to create even more money such as investing it…

Every dollar should have a job so that your monthly budget balances out to $0. Give your money a purpose and make it work for you! Plus, if you allocate extra funds for another purpose, you will be less likely to spend it on something unplanned.

Here are the categories I use in my budget:

• Bills
• Groceries
• Clothing
• Emergency Fund
• Investing
• Entertainment
• Savings
• Short Term Goal – Family Vacation
• Long Term Goal – Payoff Home Early
• Everything Else (super low priority)

Tip: Include a Savings category—Aim to save 10% – 15% of your income.

However, if after doing this calculation you find that you are in the negative, that would indicate you are spending more than you make and will need to cut back to reduce some of your expenses to cover the shortages. This is where you must decide for yourself what is a “need” vs. a “want” and take the appropriate action to limit the overspending.

• Ask yourself: Do I really need to spend $5 a day on that Starbucks Frappuccino? That would quickly add up: $5 x 30 Days = $150 a month!

Just remember, life isn’t always predicable and therefore you will have months where your expenses may vary due to spending “leakage” – smaller expenses that aren’t accounted for but add up. This can be frustrating, but don’t let it deter you. You can adjust accordingly against the values you can control, your variable expenses, to keep your next month budget in line. You can do it!

Step 5 : Assess, Analyze, and Adjust Your Budget Regularly

You should make it a routine to regularly review your expenditures at the end of each month to ensure they are in line with your planned budget. If you are not on track, decide if it is a matter of you needing to put in more effort to avoid the unnecessary overspending or if it is necessary to rework your budget to reflect your actual spending habits.

Remember to break things down by your wants vs. needs when evaluating your expenses as these are important when it comes time to making adjustments to you budget. You’ll need to play with the numbers for the tracked items to see how much money you can free up. If you are at your limits on adjusting your wants, you’ll need to turn your attention to your spending needs to see what you can compromise to reduce, downgrade, or eliminate.

• Want: Monthly music subscription
• Need: Gas for your car
• Adjusted Need: Internet for home. Reduce speed from 500MB to 300MB plan.

Use your past spending habits as a guide when trying to predict your variable expenses and get a sense of what you’ll spend in the upcoming months. Need to make cuts? Look at “want to have” expenses first.

• Ask yourself: Can I skip movie night at the cinema vs. staying in and watching Netflix?

Finally, while fixed expenses allow for consistency in budgeting, they should be adjusted only as a last resort if your numbers are still not adding up. It will require disciple and may be more difficult to part with these items, so you should carefully weigh your options when making these trade-off decisions.

After doing this budget analysis, you will have what is needed to complete your budget blueprint. By simply documenting your income and spending expenses, you will know exactly what your money is doing, how much is left at the end of the month and where you can cut back to put toward your goals.

Tip: A penny saved is a penny earned! Those pennies can add up to a lot of money (especially when compounded), so don’t overlook the little stuff. You might be pleasantly surprised at how much money you’ve accumulated by making one simple adjustment at a time.

Just review and adjust your budget on a regular basis for good or bad. You could get a raise, or you could take a pay cut…. Your utility bills could increase significantly…. You could reach your financial goal and be planning for the next. Whatever the case, keep reviewing your budget and follow the steps above to keep on track for a successful financial journey ahead!