Between inflation, layoffs, and stupidly high housing prices, having a good budget is pretty invaluable. Done right, budgeting can empower you to take control of your finances, make progress towards your goals, save money, and highlight when you need to ask for a raise or start a new job.
At the same time, it can feel a little overwhelming to start a budget from scratch. Luckily, creating a budget isn’t too difficult. It’s even easier if you know the answers to these 5 questions.
1. How do you want to develop and track your budget?
There are a lot of options when it comes to tracking your budget. These include:
- A budgeting template where you fill numbers into a pre-created spreadsheet. I like the one by Nerdwallet.
- Pros: Free/cheap, customizable
- Cons: Takes time to enter purchases/income, may forget to enter purchases
- A hardcopy budgeting book. I’ve used and loved the one that Clever Fox makes.
- Pros: Often includes graphs and prompts that help make budgeting more fun and personal
- Cons: Slightly more expensive option, not customizable (though I found the spending categories to be pretty comprehensive), takes time to enter purchases/income, may forget to enter purchases
- An Excel or hardcopy spreadsheet you create yourself.
- Pros: Free, customizable
- Cons: Takes time and research to create an effective spreadsheet, takes time to enter purchases, may forget to enter purchases
- An app like YNAB or Mint that does much of the tracking for you.
- Pros: Saves time, if linked correctly with all of your accounts it will not miss any purchases and so will accurately reflect spending and saving, can offer some customization options
- Cons: The best apps generally have a subscription cost, can be glitchy linking to multiple accounts (depending on the app), may have less impact on spending and saving if you do not check regularly
The first 3 options may be especially valuable for those who get motivated by seeing where their spending goes. Indeed, entering in each purchase can make you more aware of how much you’re spending and on what. As a result, you may be more motivated to both cut back and know where to cut back.
For this reason, I tend to prefer manual methods for getting started with budgeting and then moving to a more automated method once you have a better handle on your finances.
2. How much do you make each month?
For many of us, this question will be pretty simple. We just have to look at our paystubs for the month and maybe our partner’s if we pool finances.
However, if you or your partner have a business or side hustle that generates irregular income each month, this will be trickier. If this is the case for you, review your income over the past month (or year if income is seasonal) and try to generate a best estimate. You should estimate conservatively so that you don’t have an unpleasant surprise if a month (or several!) don’t go as well as expected. Review your income estimates for the first few months and upgrade or downgrade your estimates if they are consistently off.
3. How much do you need to keep the lights on each month?
In other words, estimate the amount you spend each month on necessities. If you think you need to cut back a lot on expenses, it can be helpful to start from the bare bones estimate of how much you need to get by. This includes things like your rent/mortgage, utilities, debt payments, necessary transportation, healthcare, and non-luxury food.
If you are just looking to track our expenses and don’t think you need to cut back a lot, you can be more generous with your necessities and include those Whole Foods purchases and a more generous transportation estimate.
What doesn’t get included? Eating out, non-necessary clothing purchases, your Netflix subscription, and anything you really can live without, even if it sometimes feels like you can’t.
Your necessities should comprise 50-60% of your total budget.
4. What is most important to you?
That last question may have felt pretty demoralizing, but never fear! Here is where we put the fun stuff back into your budget. Reflect on what is most important to you and what you enjoy most. Maybe it’s your health, spending time with friends and family, traveling, or trying new things.
Non-necessities should represent 20-30% of your budget. As you’re budgeting in those non-necessities, try to prioritize things that have real value to you and cut out all those non-necessities that don’t truly make you happy.
Do you scroll through Netflix for half an hour before rewatching something you’ve seen a million times? Do you have new clothes with the tags still on? Impulse Target purchases that haven’t seen the light of day since they left that red cart? Do you order drinks with friends but then barely notice or care what you’re drinking? Cut the things that don’t make you happy and redirect that money to things you love.
5. How much do you need to save to reach your goals?
This step appears last, but the reality is that you may have to iterate through Steps 3-5 a couple of times to land on a perfect budget for you.
You should aim to save 20% of your income. More specifically, financial advisors recommend saving 15% of your gross (pre-tax) income for retirement. That includes any employer match you may have, so you can save less than 15% if you are getting a percentage from your company.
As you reflected on what was most important to you, you may have also reflected on your long-term goals. For example, maybe you’d love to go on a trip, buy a house, have kids, or have a big wedding (or even just a modest wedding, weddings be pricey!) Reflect on when you plan for that goal to happen and how much you’ll need. If you’re looking to plan a trip, you might check out some advice on budget trip planning from Maxed Out PTO.
Calculate how many months away that goal is and then divide the total cost by the months you have left (you can also factor in any interest or returns you expect to earn as you sock away money for that goal). That monthly cost reflects how much you should save to meet that goal (for more info on how and where to save for any goal, see this post).
What To Do If Your Budget Is Misaligned
Do you have enough to pay for necessities, important non-necessities, and your savings goals? If not, you may want to:
- Cut your non-necessities.
- Find ways to save on necessities: like moving to a lower-cost location, using public transportation, negotiating your insurance, meal planning, or buying lower-cost food.
- Push back the date when you want your savings goal to happen (like aim to purchase a home in 5 years rather than 3).
- Or make more money: ask for a raise, find a new job, or start a side hustle.
I hope this guide has helped simplify the budgeting process for you. For more tips and guidance, see my post on creating a budget that makes you happy and saves you money. If you enjoyed this post or think it would be helpful for others, please consider liking, subscribing, or sharing.