If you’ve never thought about budgeting, tried and failed in the past, or simply don’t think it’ll work for your situation, I’m here to tell you, you need a budget. But, you need the right budget to make it work.
It can be a daunting task to start a budget. You’ll need an open mind and a willingness to set priorities. If you’re living paycheck to paycheck or struggling with debt, it can be tempting to just carry on and ignore the problem.
But you won’t make much progress on your path to financial freedom if you never get on the path
Step 1: Determine How Much Money You Have
The first step in creating a budget that works is knowing what you have to work with.
Take a tally of your current bank balances to see exactly how much cash you have right now. Don’t speculate about what you will have, just look at what you do have.
Include only money you have available to spend. Tally up your checking and savings, but if you have retirement accounts, leave them out of it.
You may feel tempted to ignore your savings account but don’t. I understand the out-of-sight-out-of-mind approach when dealing with savings, but that’s not really optimal if you want to be aware of your true financial state and have control of it moving forward.
Set-it-and-forget-it is a great approach for long-term investments, but for general savings, we’re going to want to assign those dollars to specific savings goals. Assigning every dollar a job means you won’t be as likely to spend it on non-priorities in the future.
Step 2: Budget ONLY the Money You Have
Next, look at your bills and obligations and see what’s coming up. Start with only the things you need to pay before you get paid again. I know it’s hard not to forecast out all your month’s expenses, but this perspective change is super important.
We’re somewhat conditioned to think of budgeting within a monthly timeframe. But forecasting like this gives you a false sense of reality. Just because you may have more money by the end of the month doesn’t mean you’ll have it when you need it. To build a budget you can keep, remember this principle:
Shifting to a
Budget Tip: Switch from a monthly budget to one that matches your pay period.
Since we’re all so conditioned to think on a monthly time-frame, it might help to see how a pay period budget should work.
If you decide to start budgeting on the 1st of the month and won’t get paid again until the 15th, only worry about paying for obligations due before then. Budget for your bills first, then cost of living expenses (like groceries and gas). If you have anything left over, drop it into some savings goals.
Then when the 15th rolls around and you get paid, do it all again. See what bills are due before your next payday and how much you’ll need for living expenses in that time and budget accordingly. Rinse and repeat.
It’s simple in theory, but it really can be difficult to get out of the habit of projecting out on a monthly basis. If you feel you need a visual overview of the month, you can download and print a copy of my At-A-Glance Bill Calendar. It will allow you to see your due dates and pay dates at a glance so you aren’t caught by surprise. But when it comes to crafting a budget that works, only worry about the obligations you have before your next payday.
Step 3: Determine Your Priorities
Depending on when you start and how your income and bills are timed, you might struggle to cover everything. It can be deflating, but try not to lose hope. Remember, awareness is the key to changing your behavior.
Crafting your new budget should give you some insight into any changes you need to make, whether it be cutting expenses, starting a side-hustle or saving when you spend.
Depending on how your income/expenses shake out, you may have a little more or less work to do, but it’s all still a matter of prioritizing your spending.
Let’s take a look at two common scenarios.
Scenario 1: “Sweet! I can cover my immediate expenses and I have some left over!”
Congratulations! You’ve budgeted your immediate obligations and have money left. Awesome! Now it’s time to do some fortune-telling. *Note I didn’t say forecasting. We’re going to be anticipating expenses, not income.
Think out a few months and picture any expenses that might have surprised you in the past. Things that may not be monthly expenses, like car registration or insurance, might seem to sneak up on you, but really just need a little planning.
Figure out what you expect to owe and when. Then split that “payment” across the months leading up to the bill.
For example, if you’re still paying off last Christmas, you know that’s an expense you’re going to have in the future. If you spent $500 last year and it’s now February, you should look to budget about $45 a month for next Christmas
You’ll also want to think about unexpected expenses like car repairs or medical expenses. Brainstorm a bit and add those to your budget.
These are your sinking funds. They’re kind of like an emergency fund, only you’ve anticipated the “emergencies.”
*Note: A lot of people prefer to have a generic emergency fund for unexpected expenses, but I find I’m more likely to tap into it if it’s not got a specific purpose. You can choose what works best for you.
Scenario 2: “Ah, crud! I can’t cover all my bills!”
If you’re living paycheck to paycheck, it’s likely you don’t have tons of cash laying around. You may not even have the cash to cover your upcoming expenses. I’ve been there, and it sucks. But there’s hope! You just have to be willing to make some tough decisions.
First, you need to analyze your immediate obligations and see how they align with your priorities. Your cable package may be super important to your nightly wind-down ritual, but are you willing to prioritize that if it means you can’t put gas in your car?
Once you’ve got your top priorities set, look for expenses can you reduce or eliminate. This doesn’t mean you have to stifle all the joy in your life. It just means if you need gas more than a relaxing night on the couch with 300+ channels at your disposal, maybe you can still relax in front of only 100 channels. Or even cut the cord and stick to Netflix.
Another trick is to try to space out your bills. I know for us, everything hit the first week of the month. That’s a large outflow that can feel overwhelming if you have limited funds. Make some calls to see if you can adjust your payment dates and spread things out a bit.
After assessing, tweaking and reducing as much as you can, if you’re still coming up short, evaluate your obligations based on payment method.
I don’t want to set your priorities for you, but certain expenses that require a direct cash outflow (rent/mortgage, car payment, credit card) should probably come first. It might also be a matter of weighing which penalties are less painful assuming some are inevitable. Would you rather pay a late fee or have your electricity cut off?
I hesitate to say it, but if you have no choice and a creditor will accept a credit card, go ahead and use it. Just know that you’re only really deferring payment this way and you’re adding to your debt. It’s better if you can get the creditor to defer the payment for you, but if it stabilizes things
Step 4: It’s OK to Make Adjustments (ie. Roll With the Punches)
Phew! You’ve come a long way toward understanding your finances and building a budget that works, but we’re not quite done yet.
If you followed the steps above, you can see what your money needs to do before you get paid again and you’ve prioritized your spending according to those immediate obligations. You may have even been able to save for future expenses and some
That’s awesome! Let’s celebrate! How about a nice dinner out. Maybe some Olive Garden or Cheesecake Factory.
Did you said, “Wait! Let me check my budget first”? No?
The hardest part about budgeting and planning ahead is having the discipline to stick to the plan.
Impulsive spending is a hard habit to break, but if you ever want financial peace of mind and a growing bank account, you’ll need to get used to checking your budget before you spend.
If you do overspend, you’ll want to find out why. Did you just guess wrong or did you start ignoring the budget? Either way, you can compensate by reducing the budget in another area to cover the overspent category. But if you’re ignoring the budget, you might want to reevaluate your priorities.
Making adjustments and moving money around in your budget is not just ok, it’s necessary. We’re trying to predict the future here, so we’re bound to be off a bit at times.
Don’t get discouraged when you guess wrong. Someone once told me, in baseball, if you hit 3 out of 10 pitches, you’ll be an All-Star. That’s a 30% success rate to be one of the best!
So don’t be too hard on yourself if you’re less than perfect. The longer you budget, the more awareness (and data) you’ll gather to help you fine tune things. With a little patience, you’ll be batting a thousand in no time.
Let’s Wrap It Up
If you’ve followed the steps above you should have the foundations for a budget that will work for you. You’ll also have a new awareness around your finances and your priorities.
The trick to making a budget that works is to make it personal. Don’t worry about what other people are doing. You’ll be fine as long as you recognize you’re in control. You set your priorities and you can change them. The key is to stay aware, be intentional and adjust as needed.
If you have any questions or need help getting set up with a budget that works, feel free to reach out! I’d love to help in any way I can.