The Roaming Economist is not a legal or financial professional and any advice or opinions expressed should be taken as general information. Please read my DISCLOSURE for more information.
Have you found that online budget templates aren’t as helpful as you hoped they’d be? That’s exactly how I felt when I first sat down to create my budget.
They were good-quality templates, but they just didn’t quite fit what I was looking for.
It took me a while to figure out why no one could create something that was just right. The answer was obvious – no one else is me, with my life experiences and budgeting needs.
Personal finance is personal.
Everyone’s situation is different, and, because of that, so are our budgets.
It wasn’t someone else’s template I needed; it was a method of thinking through my own money situation to craft the budget that was perfect for me. That’s exactly what today’s post is going to help you do too.
I’m going to tell you the basic method for thinking through your finances so you can create the best budget for you and your situation. It’ll show you how to be intentional, creative, and attentive to your budget, so it always fits you.
Two Important Things Before You Begin
No Judgement Allowed
No matter what you find as you look through your finances today, you aren’t allowed to judge yourself.
You might not like what you see, but you know what? That’s okay. You have to start somewhere. By creating your budget, you’re taking the necessary steps that will lead you to a better financial position.
Plus, it’s natural to spend a lot more when you aren’t tracking your expenses.
No One is Perfect
I don’t care how long someone has kept a budget. There will always be times you overspend, especially in the beginning.
Heck, I’ve been budgeting for years, and I overspend when I shouldn’t. (Not that you should ever use human nature as an excuse to do it intentionally.)
The first few months of budgeting are the hardest, and you won’t be perfect at it right away. However, don’t think you aren’t good at budgeting or that a budget doesn’t work for you if it’s rough at first. It’s just like anything you practice- you’ll improve over time.
So keep at it, and your bank account will thank you.
1. Start by Looking at Your Income
Ask yourself a few questions to decide on a dollar amount for your income in your budget.
How Do You Earn Money?
Are you paid hourly, on a salary, or is your income variable?
If an hourly wage determines your paycheck or you have a set salary, it’s much easier to know what your income will be each month.
Salaried employees receive the same dollar amount on every paycheck, so you don’t have to do any guessing. You know what your income number will be each month.
Although hourly workers will earn less if they have fewer shifts at work, most people try to work around the same number of hours each week. If you work hourly, estimate what you make on average. I’d suggest aiming towards the lower end of your pay range so you don’t count on money that may not always be there.
Variable income employees (like someone working off commission) are going to have the hardest time knowing what they will earn each month. There’s more to consider when creating a budget based on a variable income.
A cautious, simple answer on how to do this would be to look at six months to a year’s worth of old paychecks at least and pick the smallest dollar amount.
You don’t want to set a budget based on your best months’ earnings when your situation won’t always look like that.
I have a variable income at my job, always have and always will. It can be challenging at times, especially when you have a month where you bring in very little. It can also be a considerable advantage to wealth building when you have those high-earning months. However, it makes crafting your budget more complex.
Stay tuned for the post I have coming out soon that will tell you my best tips for living on a variable income!
What is Your Pay Schedule?
Do your paychecks come monthly, semi-monthly, biweekly, or weekly? Your payment schedule will determine how you set up your budget income.
If you’re paid monthly or semi-monthly, like on the 1st or the 1st and 15th each month, you don’t have much flexibility. You have to base your budget off the one or two paychecks you receive.
However, you have an added perk if your employer pays you biweekly or weekly. If you get a biweekly check, you receive twenty-six paychecks throughout a 12-month period. That means two months out of the year, you’ll get three paychecks!
You see the same type of benefit on a weekly pay schedule except you get fifty-two paydays. This means you’ll get four smaller extra paychecks.
Ideally, you aren’t living paycheck to paycheck so that you can use these extra checks to your advantage. However, if you are living that way, keep reading. Creating the best budget for you will help you get out of that pattern and relieve your financial stress.
Although these extra paychecks give you a particular financial advantage, you should still only base your budget off two checks a month if you’re paid biweekly and four a month if you’re paid weekly. Read the related post below to find out why.
For an in-depth description of what the “extra paycheck” is, how to find it, and what it can do for you, check out How the “Extra Paycheck” Can Be Your Secret Weapon.
Set Your Income Amount
Once you’ve thought through how you earn money and what type of pay schedule you have, it’s time to set the dollar amount for your income in your budget.
If your income isn’t as predictable and you’re more risk-averse, estimate on the lower end of your income spectrum, so you feel more at ease getting used to your budget. Nothing says you can’t change the amount later down the road.
2. Review All Your Expenses
Right now, you’re just reviewing your expenses to determine what categories you need to add to your budget. There’s no need to be thinking about dollar amounts for everything yet. The first step is to see where your money is going.
Prioritize your expenses. When you start creating your categories, I suggest starting with your more concrete, fixed costs and moving down through other necessities until you end with the money you can spend on the fun stuff.
You’ll find the following questions reflect that. It would be best if you thought about your needs and taking care of them before you think about the things you want. This will help you build a sustainable, working budget that fits your life.
Which Bills are the Same Each Month?
Begin with your fixed expenses, and I’m not talking about that subscription box you have that costs the same amount each month.
Here you should be looking at your bills that are completely necessary for your life and don’t change cost or don’t change by much. These are the expenses that would cause a severe inconvenience or consequence if you can’t pay them.
To give you some examples, in my budget, these are:
- Insurance (car, disability, renters, valuable personal property)
- Medishare (“health insurance”)
- Utilities (gas and electric, internet, phone)
You may have fewer fixed expenses than I do, or maybe you’ve got a lot more. Either way, I want to get you thinking about the types of costs you should be focusing on for this part.
Again, personal finance is personal. You have to decide which bills you have that are completely necessary for your life.
What Else is a Necessary Cost of Living?
What other necessities do you have that don’t have a fixed cost each month?
These are expenditures that either can’t be removed from your budget or would be extremely difficult to cut out that vary more from month to month than your fixed expenses.
Examples of these categories would be:
- Auto (minor car repairs, oil changes, inspections, etc.)
- Clothing necessities
- Household supplies (toiletries, laundry detergent, paper towels, etc.)
- Medical expenses (urgent care visits, prescriptions, vet visits, etc.)
- Professional costs (continuing education, work supplies, etc.)
So, what expenses do you need that don’t have an exact dollar amount associated with them each month?
Do You Have Debt to Pay Off?
What is your debt situation? After your necessary expenses, this is your next obligation.
My guess is if you’re reading this and trying to create the best budget for you, you want to figure out what your financial position is and learn how to make it better by implementing an excellent budget.
Prioritizing and paying down your debt obligations is an important part of that. Making your regular monthly payments will keep you from going further into debt, improve your credit score, and most likely start relieving some financial anxiety.
So whether it be student debt, a car loan, or a credit card you need to pay down, create an expense category for it in your budget. Don’t forget personal loans or money that family or friends may have loaned you as well.
What are Your Saving and Investing Goals?
If you “plan” to save, but don’t implement an actual plan, you’ll never end up saving much at all. Waiting until the end of the month to “save what’s left” typically doesn’t work out. Your money will always find a place to run off if you aren’t intentional with it.
That’s why you need to make an actual plan for savings. Depending on your financial circumstances and the season of your life, your savings categories and needs will change.
Here are some examples of saving and investing goals you might consider:
- Large upcoming purchases (used car, washer/dryer, furniture, kitchen remodel)
- Non-monthly expenses (property taxes, malpractice insurance, homeowner’s insurance)
- Emergency Fund (cash cushion for a rainy day)
- Down Payment (buying a home or rental property)
- Retirement accounts (IRAs, 401K, 403b, TSP, etc.)
These are just some examples; there are any number of saving and investing goals you might have.
Some should be serious, like saving for retirement and making sure you have an adequate cash cushion. However, as you improve your financial position, you can have fun savings as well for things like taking a weekend trip or buying an expensive item you’ve wanted for a while.
How Much is Left for Fun?
I know you aren’t looking at dollar amounts yet; you’re just creating the basic categories for your new budget. However, I think it’s important to note that this category comes last because your discretionary expenses only get as much attention as the money you have left after everything else.
These discretionary costs are your wants, not your needs. You don’t need them to live your life. These should be the first expenses you cut from your budget if you have to start dialing back your lifestyle.
Everyone likes to enjoy the money they worked hard to earn. I’m not saying you can never go out and do anything or spend money on yourself ever, but your discretionary expenses should take a back seat to your other obligations.
If you set up your budget with that in mind, your discretionary spending won’t cause you to feel guilt or make you worry there won’t be enough money for your bills at the end of the month.
Some examples of discretionary spending are:
- Entertainment/Activities (going out with friends, seeing a movie, etc.)
- Fun money (money to spend on other wants)
- Dining out
Now I do think it’s essential to make some room for you to have a little fun even if times are hard. You don’t want to burn yourself out. However, there’s a way to do it without going overboard and having your wants overpower your other budget categories, wrecking your budget in the process.
Check out 4 Key Benefits Of Fun Money In Your Budget to see why you need to incorporate at least a little fun money.
3. Assign Dollar Amounts to Your Expenses
Estimate Based on Your Previous 3 Months' Spending
Now it’s time to decide the dollar amount you should attach to each category you just outlined. Well, how do you know what’s a reasonable amount?
For your fixed expenses and debt payoffs, this is easier. These bills will be the same amount every month, so you know what you’ll set aside for them.
When it comes to other expenses, where do you even start?
I suggest looking at your bank and credit card statements from the last three months. Don’t pressure yourself to find “the perfect amount” right away—average what you spent during the previous three months and try that out for the first few months of budgeting.
Remember, you can always change your expense dollar amounts later down the road. You’re just trying to find a starting point as you begin your new budget.
My Estimated Expenses are More Than my Income?!
What happens if the sum of all your expenses is more than what you bring home each month?
Well, you’ve got to change something. The key to a successful budget is consistently spending less than you earn and saving the difference. Otherwise, you’ll deplete your cash reserves or land yourself in debt.
You know what you have to do- either cut your costs or increase your income. The easiest thing for most people to do, especially to get immediate results, is to reduce their expenses.
Start with your discretionary spending and look for line items you can decrease or cut out of your budget to make sure you’re at a net positive by the end of the month.
Keep searching through your saving/investing, debt payoff, and necessities categories for areas to reduce spending until your expenses are less than you earn.
Don’t overlook your fixed expenses either. Some fixed costs like insurance can be negotiated down or be significantly decreased if you switch to a different company.
Decreasing expenses isn’t always as easy as deciding to cook at home or cutting your grocery bill in half. Sometimes you have to make more drastic changes and switch insurance companies, refinance loans, or move into a smaller apartment with lower rent.
4. Put Your New Budget Into Action!
Okay, now you have to put your new budget into action. Every few days, enter your receipts, or if you prefer an automated budget system like Mint, look at what you’ve purchased and how you’re doing.
Even with an automated program, you need to check in frequently to see how much you’re spending. Out of sight, out of mind. The best budget for you isn’t going to work unless you properly implement it.
Thinking about your budget and how much you have left in a particular category when you make purchases is going to help keep you on track. You’ll be much less likely to overspend when your budget is at the front of your mind each time you swipe that credit card.
5. Don't Forget...Revisit Your Budget at the End of the Month
Although you’re tracking your expenses regularly, see how you did overall at the end of the month. No matter what you find, don’t change your budget just yet.
A month is only a snapshot of your financial situation. Before making adjustments, give yourself some time to get used to budgeting. After you’ve settled in a little, you’ll have a better idea of what revisions you should make.
After one month, you’re just noting how well you controlled your spending and where you may need to spend less. I recommend reviewing your finances at the end of each month even after you’ve budgeted for a long time.
To see how I do my monthly financial progress report, check out our Financial Progress Reports page.
6. Check In and Make Changes After 3 Months
Now that you’ve been at it for three months, you’re just now starting to get the hang of budgeting. That’s right, it may take around three months for you to start getting used to a budget once you make one.
This doesn’t mean you’ll be perfect, but you’ve already started forming the habits that will get you on a path to financial betterment.
After you have three months of budgeting under your belt, review those months as a whole. Looking at this bigger picture will give you a better idea of whether or not you need to adjust the dollar amounts assigned to your expenses.
Part of making sure your budget continues to be the best budget for you is to tailor it to fit your situation as your circumstances shift. You should revise and improve your budget as your life changes.
As you get used to the flow of your budget you don’t need to do this every three months. You can switch to an annual financial checkup instead.
See how to do an annual financial checkup here, Your Annual Financial Checkup: Diagnosing Your Budget Illnesses.
Armed with the best budget for you, you’re now ready to begin down the budgeting path to success.
Just keep in mind, budgeting is easy; self-control is hard. That’s why no matter how long you’ve been at it, there will always be months you fall short.
However, don’t let that get you discouraged. Remember, you’re crafting a better future for yourself. You’ll also have months where you totally knock it out of the park.
Comment below to share what you think the hardest part of budgeting is for you? What is it you get hung up on?