How to Make a Budget From Scratch
According to this Gallup poll, only 1 in 3 Americans prepares a detailed monthly budget. Only 1 in 3. That means that 66% of people out there have no idea what is going on with their month-to-month finances and that is terrifying.
Considering that most people wish to retire someday (usually the same or better off than they were), this is a staggering statistic. That is the equivalent of driving from New York to San Francisco without any map or navigational help. You might get there. You might end up in Costa Rica.
Don’t accidentally drive to Costa Rica.
I’m not even sure if that has happened before, but what does ACTUALLY happen all the time is people that do not have enough to retire. People that can’t retire because they stuck their head in the sand and just hoped everything would work out.
Ensure that you will hit your financial goals and get yo’ self a financial map. The best way to orient yourself to complete your financial goals is to start utilizing a monthly budget. Now, this might sound like a scary concept if you have never started before. But it’s not. I promise. And I’m going to be here to walk you through the process, okay?
Let’s do this.
1 – Calculate Monthly Income
This includes your after-tax paycheck, rental income, or income from a side hustle. All of it. Write it down.
If you are not sure what your after-tax income is, check your direct deposit amount.
2 – Add Up All Your Expenses
Okay, so there are two types of expenses: variable and fixed. They are exactly as they sound. Variable expenses might change from month-to-month, or maybe you just do not spend the same exact amount every month. That’s a variable expense. Groceries are a variable expense.
Fixed expenses are expenses that do not change every month. These are things that have a set payment date with the same amount due every month. Rent or mortgage payments are a fixed expense.
The last part of this step is to add up the total of all your expenses (fixed + variable) and subtract it from your total monthly income. If you are mathematically challenged, your formula will look like this:
TOTAL MONTHLY INCOME – (FIXED EXPENSES + VARIABLE EXPENSES) = LEFTOVER
3 – Set Goals and Priorities
If you have leftovers after all your bills and expenses are paid, then sweetness! You get set goals for yourself! Start asking yourself questions like:
- what do you want out of life?
- What things should you be saving for?
- For you, maybe this is saving for a down payment on your house.
- Maybe you are saving for a grand adventure vacation.
- Retirement is one common, but hugely important goal to be saving towards.
This step might take some digging and figuring, but it is important that you take the time for it. Doing this is the difference between making your goals REALITY or just continuing to wish that they will magically happen.
And it’s okay if you have more than one or two goals. In fact, that’s awesome! Get it gurl. But since we have more than one simple goal, we need to prioritize which goals are more important OR which goals are more time-sensitive than others. For example, retirement should be high on your priority list if you ever plan on eventually not working anymore. However, if you are trying to save for a house payment, too, it’s likely best to downsize your retirement contribution in order to contribute more to your house savings goal.
Likewise, perhaps you are saving for a sweet action vacation to the Tropics, but you also have your sights set on being out of debt in three years. In this case, your commitment to slashing your debt in a timely manner trumps your goal of an awesome vacation.
Yeah, prioritizing isn’t always fun.
4 – Budget the Fun Money
Wut wut, this is the fun part! This is your extra money that you set aside for non-essential lifestyle items or services. Like Netflix, the ESPN Sports Package, weekly Starbucks budget, or an overarching “entertainment budget” that is for dining out + getting drinks with friends. What do you want to have money to do? Whatever it is, budget it in.
5 – Evaluate Bank Statements
Okay, this is the step that most budget tutorials miss entirely. This the key to budgeting success. It is the least sexy step in the whole process, but it is what will mean success or failure six months down the road from now.
So far you have a rough budget that includes expenses, savings goals, and fun money, but what we haven’t considered yet is your current spending habits. If you are a spendaholic, you cannot reasonably assume that you will go from undisciplined spend-what-I-want-when-I-want to strict budgeting. Just like crash diets, it is a recipe for failure and will not show you any long-term change.
This part requires you to be transparent and honest with yourself. Log onto your online banking system and print off at least two months of past bank statements. What you need to do now is go through, line by line, and write down what exactly you have been spending your money on the past two months. I find that putting frequent charges or those similar in nature into a category to make things easy. For example, if you have a lot of Subway or lunch charges, make a “dining out” or “lunch out” category. Same if you stop by Starbucks/Speedway/Dunkin’ Donuts frequently.
When I first tracked our expenses, my husband was spending over $250 each month for lunch! He dined out every day and we never thought any different of it, because we didn’t really know how much we were actually spending each month.
6 – Add Training Wheels
Okay, so the likely outcome is that you found that you’ve uncovered some spending habits you didn’t really know you had. Since we cannot just cut this out, we need to make a plan to slowly wean you from this spending habit, assuming it’s one you want to cut.
If your budget it maxed out, and you just discovered you are spending $300 on random Target trips every month (no judgment here, I feel you. That store is tricksy), you most likely will not be pleased with the results should you try to just stop. Instead of blowing your newly constructed budget and getting discouraged, we are going to add some budget training wheels as I like to call them. We need to figure out a reasonable amount that you can spend this month, then gradually decrease it. Three to six months is plenty of time to cut the habit.
So, going with that $300/month Target shopping, next month give yourself a similar amount, but a little less. Something like $250. Then in the second month, cut out $50 (now you’re down to $200). The third month, another $50 and so on until after that 6th month of training wheels, you no longer have any budget for Target and can now reallocate those funds towards one of your goals or fun money.
I know what you are thinking: where does the money for the training wheels come from? Well, you will have to consciously trim those funds. The first place that you trim from is fun money. If fun money doesn’t cover all the training wheels you need, then cut into your goals for a few months. This is only temporary – just three to six months, so it shouldn’t be a huge impact on your goals.
However, it should also be a great motivator for you to want to kick those training wheels off! Each month you still need them is another month that you are not working towards your goals. It’s another month that you cheat yourself of fun money and all the experiences that come with it.
7 – Live it!
You made it! Congratulations! You are this much closer to achieving your financial goals and creating a life you love – all because you were able to set aside some time and get clear and honest! You are miles ahead of the 66% of Americans who still have no clue what happens with their own money every month. Be proud, mama!
Extra Things to Consider
Many people flip Steps 3 and 4; some prefer to budget out lifestyle and fun money, then simply allocate the extra towards their goals. If you think that will work better for you, then do it! You know your family best. I will just say that by prioritizing your goals OVER your lifestyle, you are far more likely to see success. Budgeting for goals requires you to take an active approach to your life and your finances and it is why I advocate for budgeting this way. But again, you do you.
The second thing to consider: this is going to take some trial and error. You might have to keep tweaking the amount you can allocate to your goals or the amount you set aside for groceries. Budgeting requires a finesse of constant micro-wiggling around to find that balance that works. Don’t be discouraged if it takes you a few different drafts to come up with a plan that makes financial sense. In the same breath, don’t get discouraged if it takes you a few months to get into the groove. Sticking to a budget, especially when you have never done it before, it tough! There’s definitely a reason most people aren’t doing this; most people are not willing to put in the work to figure it out.
But you are not most people. And that my friend, is what makes you awesome.
Figure out your monthly income (after tax), then calculate your total expenses – these are essential items like food, housing, transportation, etc…Subtract total expenses from your total income to get your LEFTOVER amount. This is the amount that we further break down into goals, fun money, and training wheels (if necessary).
First, go over your goals. Write them all down, then go through them and prioritize them based on time-sensitivity and importance. Commit to an amount you can dedicate towards your goals every month, or even for a short-term until you can revisit how that amount is working.
After setting aside room in the budget for the essentials and funds for goals, decide how you want to have fun! Money is supposed to serve you, so if you can’t have some fun with it, what’s the point? Dedicate fun money to coffee trips, lunch out, or nights with friends.
Finally, be sure to review your spending habits and evaluate if the budget you’ve created is realistic based on your past spending patterns. If not, create “training wheels” to wean yourself from poor spending patterns and work towards aligning yourself with your financial goals and giving yourself the freedom to enjoy your money.
Don’t get discouraged. Stick with it. TWEAK TWEAK TWEAK. Continue to revisit your spending habits and goals. And enjoy your newfound financial awesomeness.
Now you can sound smart when you tell all your friends that you’ve been budgeting.