Budget. The B-word. I know many people who just cannot get excited about the b-word unless they get excited by personal finance and are interested in FIRE or investing. Have you ever wondered how to create a successful budget? Or perhaps you’ve wondered how to make your existing budget better or more efficient? If you have, the good news is that budgeting is really just a plan for spending your money. It’s really just simple math; plain old subtraction. That and understanding a little psychology about how you view money.
Parts of a Budget/Spending Plan
Let’s start from the beginning. Budgets/spending plans are made up of a few different pieces and this goes for everyone.
- Income
- Fixed expenses
- Variable expenses
- The leftover
That’s really all there is to it. Figure out what you must pay for to survive and tag each item as either fixed or variable. Subtract these things from your income and voila ~ you should have a leftover number. Now let’s get into each of these categories.
My expenses list probably looks something like yours and some of these could be considered fixed or variable.
- Housing (rent/mortgage payment)
- Home/renter’s insurance
- Electricity
- Internet/cable/streaming
- Food
- Pets
- Car (payment, insurance, gas)
- Household items (soap, paper towels, toilet paper, etc)
- Savings
I consider housing, insurance, electricity, internet/streaming, car payment/insurance to all be fixed expenses. I have personally created a fixed expense line for each of the other lines that could be considered variable (food, pets, household items, savings) and given them each a ceiling. For example, in my personal budget I have set a ceiling for food at $400 per month, the dogs line is $110, household items are $45 per month and my savings line is $150. The goal then is simply to stay under that amount because I know that I can afford up to that amount. This transitions them from variable to a fixed number you can work the math with.
This creates rules for spending and gives me a little wiggle room to work with throughout the month so that I’m not constantly sweating every purchase. As long as we stay under the ceiling, we’re golden.
Revise and Improve
The first box we want to check is to make sure that our income- expenses is not negative. Hopefully, we have some leftover at this point, but if that’s not the case you have two options.
- Play with the numbers to make them work
- Get serious about finding ways to bring in more dollars to make the numbers work
Now that the math works, go line by line and consider whether you could *realistically* lower any of these lines. It doesn’t make sense to slash a food budget from $400 to $100 if you can’t really do that (in the current climate with the 8% inflation, I’d say that’s definitely going to be a tough one), but you should think outside the box here. Could you get by on one car if you’re a multi-car household? Could you make a one time investment in a reusable version or something to cut down on the frequency of some purchases (reusable water bottles/Brita pitcher instead of plastic or microfiber clothes instead of so many paper towels)? Could you switch insurance/internet/streaming companies to get that “new customer” discount? Revise any line items where you can shave off a bit. You should be able to find at least one area you could shave.
After that, redo the math and what’s leftover now needs a job. This is the part where you need to really think hard about what matters to you, what you value and what kind of spending brings you the most joy and satisfaction. We all care about different things. I personally value spending money on solving problems that bug me, my dogs, and working towards creating a future where I don’t have to work full time to sustain my lifestyle– so I spend money on those things. You may care more about your car, traveling, or on buying all the fancy cheese. The point is you must figure out what those things are and then focus on how to make your money work towards those things.
This leftover amount should include a savings and spending plan. Even if saving doesn’t excite you, things inevitably happen and you’ll always be glad to have a savings cushion. I have done several versions of my budget and shift numbers around until I’m satisfied with the split. I revisit it every few months to make sure the plan I’ve set it still makes sense based on the costs I’ve assigned.
Try to account for everything you could ever spend. For me, this “leftover” amount includes:
- savings
- IRA investment
- tax savings (I have side gigs)
- a gifts fund
- personal spending
- unplanned/spontaneous spending
You may not need such a detailed break down of all of your leftover spending. My brain likes having the categories with their rules so that I can plan my spending out and track it. I know to send $150 to savings, $100 to my IRA, $100 to my tax savings, and $100 to my personal spending accounts. I send $135 to a gifts fund and then allow the rest of the leftover money to be considered “unplanned/spontaneous” spending. This covers me for all of the unforeseen things that come up like vet visits, a last minute dinner out with a friend, repairing/replacing something that broke unexpectedly, or having the option to do something nice for someone. This has been the most freeing part of my personal spending plan.
A good rule is to not spend more than a quarter of this amount per week so that you’re ready if something comes up at end of month, but it’s not a hard rule. If I am going through that money a little too fast at the beginning of the month, I will put a week-long pause or so on spending to slow it down and I have no qualms with spending all of it. There’s only so much glory that comes from spending nothing and enjoying the minimum in life. If you’re not in debt-payoff mode, a little spending for the sake of enjoying life is the point, isn’t it?
How to Track Spending
You can use a spreadsheet, an app, or simple pen and paper. Everybody’s brain works a bit differently so there is no one size fits all for choosing a way to track, as long as you keep track. I personally use a combination of spreadsheet and pen and paper. I have my high level spending plan in spreadsheet form and I keep a monthly, more detailed log of what I’ve spent in each category using a pen and ALOT of post its in a paper planner/agenda notebook. While I know I’m in the minority, it works for me and so I continue to do it this way. Find what works for you and just be consistent.
Now that you’ve set up the system, your only job is to stay within the lines you’ve set and enjoy the mental freedom! You don’t need to feel guilt for spending, because you’ve already planned out how you’ll do so.
Treat it Like a Game
Once you have a system in place, the main goal is simply to stay within the lines here. Spend less than the ceiling amount you set and all is well. If you want to take it up a notch, though, treat it like a game. Aim to come in under your ceiling amount in at least one (if not more) categories, if you can. I always set my ceilings a little higher than I think they need to be so that I have that wiggle room built in and aim to come in under as often as I can. Even if it’s $5 under, you can send that $5 to something important to you (investing, saving towards something, donating it to a cause, etc.)
Have a way to Make Extra
Since the gig economy is now the way of the world, it has never been easier to make a few extra bucks if you’re willing to do a little extra work. I personally have a handful of things I do every month to make extra money beyond what I “need” to live because I have big and varied goals. I dog walk/sit, teach adults and children English, do surveys, and Doordash regularly. I sometimes will also do mystery shops if the right one comes along. My goal every month is to make $500 extra over my paychecks, but most months I make more than $500.
Bonus Tip
If you are self-employed or get paid two paychecks per month, I found it helpful to create a table that lists all of my bills (in order with their due dates) and it corresponds to my paychecks. You’ll see that on the left side, it breaks the weeks into 7-day and 8-day weeks (this makes all months equal whether they actually run Monday-Sunday or not) and leaves a spot to record either the money made that week (for self-employed tracking) or the extra gig money earned (if you are working in addition to your regular paycheck.
This is my personal table that I use in my own tracking system every month. Weeks 1-2 are the first paycheck, weeks 3 and 4 are my second paycheck. It’s important to have a buffer in your checking account for months like this one, because you’ll see that I had several things I needed to pay/buy during the first eight days of the month but I didn’t get my first paycheck until June 10th. Keep in mind what bills belong to each paycheck and you can color code or draw a line between them if that helps make the division clear.
I hope this helps simplify the process. You don’t have to follow a special formula or do any fancy computations — just basic subtraction. I’d love to hear about your system in the comments if you use a different method. Let me know. 🙂