by Jessica Krassow, MBA
Do you know where your money goes each month? Do you seem to have less money than you need? Does budgeting seem hard or even impossible?
Sometimes creating a budget can seem harder than it actually is. There is good news, though—it doesn’t take a business degree and you don’t have to have fancy software, or even use your old-fashioned checkbook register. All it takes is a little patience, a little organization, and a little math.
My husband and I choose to use Excel for our bookkeeping, as my husband is an Excel whiz, and enjoys creating formulae, and I pay our bills and keep track of our finances and I like the format, so that’s the route we take. If you’re not comfortable using Excel, don’t worry—there are numerous free and low-priced options when it comes to budgeting software. Just a simple Internet search yields multiple options which you can compare and select what works best for you and your family. And if you are really in a pinch, you can simply use a pen and paper, and the calculator on your phone.
Here’s how to set up your budget:
Agree that you and your spouse/partner/significant other/other budget contributor will do the budget together and agree on what you’ll spend. If you’re single, you won’t have to agree with anyone, but decide that you’ll have the self-discipline to follow-through. All parties must agree, or your budget won’t work.
Decide how often to do your budget. Do you get paid monthly? Weekly? Two times a month? Every other week? It’s usually easiest to do your budget every time you get paid and make your “budget period” the time between that paycheck and the next paycheck.
Compile a list of all your monthly expenses and the amount of each one, and then break that down into separate lists of what is usually due during each budget period.
Divide all your numbers into two columns. The first/left-hand column is money that comes in (income), and the second/right-hand column is money that goes out (expenses). At the end of your budget, the bottom of each column should have a grand total for that column, and the two totals should be equal to each other. The two totals must be equal, or your budget won’t work. This is called a zero-based budget, and it gives every dollar a name (you don't want an unnamed "slush fund" at the end of the budget, because it usually "disappears").
Start with income, in the left-hand column. Your first line (and often the only line) in your left column should be the amount of money you make in that budget period, i.e. your paycheck amount. If you receive child support, alimony, or other income from investments, you should include them as separate lines in the left-hand column at the top of the column. Total all income and write this amount at the bottom of the column. This is your “grand total”—the total amount you have to work with during this specific budget period.
Now it’s time for expenses, listed in the right-hand column. The first line in your right-hand column should be the amount you will contribute to your savings account. It’s a great idea to set a target to put at least ten percent of your paycheck into your savings account, and even set it up on direct deposit, so you’re assured of the money not getting spent on something else. You may list retirement contributions or other contributions to investment accounts as separate lines in the expense column under the savings line.
List all other expenses line by line, with amounts. Some people like to list them in order of type, i.e. utilities, food, gas, etc. Other people like to list them in order of amounts, disregarding type of expense. It’s your choice. Once you have listed all expenses, line-by-line, total all expenses together and write this amount at the bottom of the right-hand column. This is your “grand total” of expenses, and should match the left-hand column total.
What if your columns aren’t equal? If your column totals aren’t equal, it’s time to make some adjustments. If you have more money on the income side, allocate more money in one of your expense column line items, ideally savings or investments, but it’s also a good time to start allocating money for bigger, planned expenses later, like a vacation. If you have more money on the expense side, you have to decide what will get cut that budget period, since you don’t have enough money to do it all. Move some things to future budget periods, or decide you don’t really need that line item.
Be sure to account for one-time or seasonal expenses, i.e. clothing expenses, car repairs, medical bills, replacing furniture, vacations, or anything else that fits this description. Cars break, children grow, and people get sick. Decide what your total will be that you need to spend on each item, and if you have enough left over in the current budget, you can allocate it all at once as a single line item in the expense column. If you don’t have enough money in the current budget period, budget a smaller amount over several different budget periods to have what you will need.
Allow for fun-money. If you’re doing your budget with a partner, it’s a great idea to allow each person involved in the budget to have a little bit of fun money he or she can spend without having to ask the other person’s permission. If you’re single, allow fun money that you can spend without having to allocate it to a particular expense item. This allows for spontaneity without guilt. Create a specific line item in the expense column for fun!
What do you do when the unexpected happens? If you have something come up that isn’t in the budget, you have to take the money you spend for the unexpected item from another budget line item somewhere else. Money doesn’t just come out of thin air, so neither can that budget item.
Follow your budget, and stick with it.
How to stick to your budget: Sticking to your budget requires a simple commitment to actually do what you have written down on paper. There can’t be any extras that get snuck in, or changes that get made without taking money from somewhere else, and without all parties’ agreement. This is why it’s so important to have all parties agree at the beginning that they actually have to agree on everything in the end. The old adage that financial woes create relationship woes is unfortunately true. It’s ultimately a trust issue. If you blow it during one budget period (and you will occasionally), all is not lost, just do better the next time. You’ll eventually get the hang of it, and it will get easier!
If you have seasonal or irregular income: It can be tricky to do a budget if you’re in a line of work where you are paid on commission or seasonally, but it’s not impossible to create a budget, it just looks a bit different than the steps above. You will have to put money in savings whenever possible, and create a budget based on average earning over short periods of time. You pay expenses with whatever income is available to you, and save leftover money for future expenses. This is not the time to splurge and use your extra money on a large purchase or vacation! Budget that vacation or new car in smaller increments in the expense column over several budget periods.
A note about cash versus credit cards: Many studies have shown that when you spend cash, you spend less money overall, and you enjoy your purchases more. Even if you choose to pay with a debit or credit card versus cash, remember that you’re still spending actual money. Pay off your credit cards each month so you don’t get stuck in the never-ending cycle of increasing balances and increasing interest/fees.
Bottom line: You can control your money instead of letting it control you. It takes practice and time, but it’s worth it, and you can do it!
photo by rawpixel on Unsplash