The Nuts and Bolts of Budgeting. The How to Guide

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OK, so in the last post we investigates some of the reasons we may not like budgeting and also what a budget actually is. Now, let’s look a bit deeper into how to actually do a budget and talk nuts and bolts. Keep in mind, one incredibly crucial thing about this is that if you are married, both spouses have to be involved in the budget discussions. If one spouse makes the budget and forces it on the other, it will not work. This is why when I coach families on their finances, both budgeting, financial coaching, debtspouses have to be involved.

How Do I Start Budgeting?

Step #1 is to start with your take home pay for the month. Don’t bother with the pre-tax income, because you know that’s not what ends up in your bank when you get paid. Start with your take home pay and if you get paid twice a month or have other income sources, tally all that up and get the total take-home income amount.  If you get paid every two weeks, there will be a couple months when you get 3 paychecks. On those months include all three, but for the rest, just include the 2 paydays.

As you might be figuring out, every month is different. And that is definitely the case with budgeting. You may have different income for the month and you will almost certainly have varying expenses each month. Sure, there are many expenses that are the same each month, but think about how you would budget differently for December vs. April. You are likely to have holiday travel or gifts to factor in your December budget that you wouldn’t’ have in April, so it calls for different budgeting.

Once you have your income down, then Step #2 is to look at your expenses. If it’s your first time budgeting, the best place to start is with your expenses last month. This is where you have to be honest. Don’t estimate; put down what you actually spent (to the nearest dollar). This will take some time. Invest a few hours in yourself and your finances to really dig in and get the facts about where you money is going. I recommend people do their budget on paper the first time (or every time). There is something about writing it down and seeing the numbers that is more impactful to people. Even if you just use a plain piece of notebook paper to do it, that is absolutely fine. It doesn’t have to be fancy. Once you get better at budgeting each month, and you want to pursue an electronic tool, feel free to do so.

Ok, so you’ve got your take-home income at the top of the page and now you’ve put down all the amounts you plan to spend this month (based mostly off what you spent last month). Step #3 is to do the math to see if you will be over or under your budget at the bottom of the page. If you are over budget, that’s not the end of the world because you’re doing this exercise before you spend the money. This is proactive and you have a chance to go back and look deeper at certain categories to see where you want to make reductions.

Be Honest With Yourself

If you happened to be over budget when you first ran the numbers, don’t panic. Step #4 is reconciling and making changes in your budget so the expenses are not more than the income. It’s quite common for the expenses to be more than the income on your first pass, so now you need to be prepared for some brutal honesty…and some realistic sacrifices. For example, if you are spending $1,000 per month on groceries and tell yourself you can reduce it to $200 to meet your budget, that’s going to be a bit of a stretch, especially for the first month. Pick a realistic reduction target and have a plan as to how you’re going to do it. Maybe you’ll stop shopping at Whole Foods and start shopping at Aldi instead. That will bring you some reductions, but maybe not $800 per month. Keep making changes and adjustments until you end up with zero at the bottom of your budget sheet. Income minus expenses should equal zero, so this is a zero based budget.

This is also where some hard work is going to come in because you now have to truly decide what is a “need” and what is a “want” in your budget. The items you need to purchase or spend money on will naturally have to come first like food, clothing, transportation, and housing/utilities. If there is money left over, then you can start to get into the items you want to purchase. By purposefully going through the items you are planning on spending money on, you are saying “yes” to the things that you have to do and have money to do and “no” to the things that you cannot do or cannot do right now. There is a lot more the topic of “needs”. Just look at transportation; should you ride the bus, get a used car, or get a new car for your transportation. Be honest and make the sacrifices where necessary.

Go Forth and Conquer

Step #5 is to go forth and execute the budget you’ve made. Again, this is easier said than done. You’ll likely find yourself at the grocery store and everything looks tempting. One part of you says, “oh, just one more thing won’t matter”. Another part of you (the part that wants to budget) says, “was that on our list” or “does that fit within our budget”. In Step #5 where you are going about your daily and weekly routines is absolutely where the rubber meets the road and the battle with budgeting can be won or lost. How do you control how much you spend when you are at the store and faced with the decisions?

One of the most reliable ways to not overspend is to only take the amount of money with you to the store that you are able to spend within your budget. Likely the most famous way to do this is using the envelope system. To do this, you literally take envelopes and put cash into the different category envelopes each month. Do you have to take the actual envelope to the store with you? No, but you can take the cash from it and put it in your wallet when you go to the store. That means you are only paying with cash and not pulling out your credit card. This is a sure fire way to not go over your spending limits. No cash, no purchase. It’s as easy as that.

You don’t have to use the envelope system, but it certainly is one way that works. Now, regardless of whether you are using an envelope system or another way of staying within your budget, the trickiest time will be toward the end of the month. To continue the grocery example we started earlier, money for the month is getting pretty low now and you still need food for the rest of the week. No one said this was going to be easy, right? This is where the sacrifices get very real. Don’t cave and pull out the credit card and rack up debt. Stick to your guns and make those sacrifices.

You’re probably also wondering what to do when legitimate changes need to be made mid-month. Not to worry. You can shift funds between categories to account for an unforeseen need. Let’s say you find out that your parents are coming into town and you want to be able to make a nice meal at home for them when they visit. The only problem is that you’re out of grocery money for the month. Fortunately, you didn’t spend the clothing money you had set aside (or it can be put off until next month). Shift the funds from your clothing budget over to the grocery budget that you need. This is just a shift for this month and your bottom line expenses still need to zero out with your income. This is not spending more money and putting it on a credit card, it’s just a shift between categories for the month. This is totally normal and to be expected. If there is a consistent shift each month though, be sure to make the change for your next month’s budget since you are realizing that your spending pattern is different than you thought (see Step #7 below).

Tracking Your Progress During the Month

You’re in the thick of your month now. It’s challenging, but you’re pretty sure you’re doing what you are supposed to. But how do you know? Step #6 is to track your progress as you go.  Now you have to look back and see if you are on track. If you choose to manage your money with a good old fashioned envelope system, you’ll have a good idea already, but no matter how you are keeping up, you need to check during and at the end of the month to see how you did. Don’t be discouraged; you are almost certain to not get it perfect the first few months. Don’t fret thought, this is totally normal and expected for any type of activity you are new at. Like all things in life, it will take practice.

Tracking expenses sounds like a lot of fun, right? Wrong. Neither is doing laundry, but you have to do it to have clean clothes. Without a proper check to see exactly where you money went, you’ll never fine tune your budget and control your spending. If it’s too cumbersome to do it all at the end of the month, do it weekly or even nightly. That’s how you keep it fresh in your mind too. You brush your teeth daily (at least I hope you do) to keep them healthy, so why not take a couple minutes to track and keep your budget and financial life healthy.

Also be very honest and diligent about your cash transactions each month (as opposed to debit card). With a debit card you have a record of where you purchase something, so it is easier to track and categorize. With cash, you may not get a receipt and if you’re like me, you’ll forget what it was you spent that $5 or $10 on when you sit down in a couple days to reconcile. If you have a habit of stopping by the local coffee shop and getting a coffee with the cash in your wallet, be very diligent to track that. Those types of expenses can add up very quickly and kill a monthly budget if you let them get out of hand.

This brings us to our final step. Step #7 is to make adjustments where necessary. Especially if you made some shifts along the way, a few adjustments will be necessary as you start your next month’s budget. Keep up this same process each month and you will definitely get better at budgeting. The people I coach who say they don’t budget because they failed at it, really never put in the time and effort to do it right. If you just set some arbitrary amounts, then spend how you want and never track it, you’re not budgeting. Put in the time and effort and you’ll be amazed how good you get and how empowering it is to be telling your money where to go.

Recap key elements:

  • Budgets are intentional and proactive
  • Budgets are done before you spend the money
  • Budgeting puts you in control of how and what you spend your money on
  • Be honest with yourself and set realistic targets for reductions
  • You will need to make sacrifices
  • You will not be perfect, so prepare to miss the mark for the first several months, but fear not, you will get the hang of it…if you stay with it. Do not give up after one month!

If you would like help taking control of the financial aspects of your life, please consider Aspelin Financial Coaching to help you be victorious with your money! Servicing clients in all 50 states via in-person meetings, video calls or phone consultations.