Lately we’ve been focusing on several deep personal finance topics. Whether it be what net worth is, how to grow it or the potential benefits of budgeting, I think its all foundation type stuff that needs to be first on anyone’s personal finance checklist.
Now its time to get to the nitty gritty. Its time to discuss how to create a budget.
If you are still reading consider yourself either a current or future finance nerd. Not everyone wants to create a budget. Its just one of those things that isn’t any fun but is something I consider a backbone of my success.
There are two pieces to the wealth creation puzzle
The two pieces to the wealth creation puzzle are growing income and reducing expenses. Everyone (and I mean everyone) seems to want to focus on the income side. Whether its growing your income or starting a side hustle it seems to be everywhere.
It all seems so sexy doesn’t it. People can picture themselves making a bazillion dollars with so much extra cash they can wipe their…
Whoa whoa whoa. Things almost got a little out of hand there.
What I’m getting at is that reducing your expenses seems to get the shaft. I believe so strongly in budgeting I think it should be considered a side hustle.
Add in the fact that Math, MATH! Of all things just isn’t fun for a lot of people.
What a budget can do for you
I believe there are two key benefits to anyone that has a budget.
The first is that it gives you a plan. It gives you a direction and something to aim for. This direction is clarity and sometimes a little clarity is all we need to keep motivated on our path.
Early on when I was getting started in the personal finance space I remember having crystal clear clarity (say that 5 times fast) on what I wanted to accomplish: getting out of debt.
I’d listen to Dave Ramsey everyday and I’d know that the dollars I was bringing in at work were keeping me on my path to paying off my debt.
The second thing it gives you is freedom.
Say what??? Freedom from a budget. I know you’re thinking I must be sadly mistaken. Most people think budgets paint them into a corner and force them to sit at home every night and twiddle their thumbs.
I think budgets do the exact opposite.
Full disclosure I am a bit biased. I’m a Jocko Willink fanatic and believe strongly in the #disciplineequalsfreedom movement.
Here’s a quick video so you know where I’m coming from.
It boils down to the fact that by consistently doing an action every day, week, and month (a budget/tracking expenses in this case) gives you freedom in that area.
Let me paint a better picture for you. Imagine you have set up a budget and are tracking your expenses to that budget nearly every day.
When it came time to grab a bite to eat or splurge on that new phone case wouldn’t you feel good about the fact that you have the ability to make that purchase? The alternative is that you don’t know how it will effect your finances or if you even have the money.
I’d choose discipline and the freedom it brings every day of the week.
Step 1 to creating a monthly budget: Determine monthly income
Lets start with the simple stuff. Determining your income should be fairly straight forward.
Pull out that paycheck and look at the number. Now you know where you stand. We cannot exceed that number! At least to begin with.
Longer term we want to have a big gap between your required monthly expenses and your income so we can take the gap between the two, invest it and grow that net worth!
Its too common for people these days to spend what they make (or even more)!
Side note: If you don’t know what factors influence the difference between your gross income (probably the number at the top of your paycheck) and what you take home I’d highly recommend reading up on that.
Step 2 to creating a monthly budget: gather your expenses
Now onto the not so fun part: the expenses. The easiest way to do this may be to open up your checking account or credit card statement and start thinking of the various buckets that these expenses fall into.
Don’t worry I’ve provided a google sheet example you can open up and take a look at an example.
The idea here is to include everything. Depending on how hard core you want to be about this will dictate your number of buckets.
I’d recommend starting out with a lot of buckets and simplifying over time. For instance a few of your buckets at the beginning may look like:
- Child #1 expenses
- Child #2 expenses
- Child #1 pre school
- Daycare expenses
After you have a better handle on your spending this may all fall into a single bucket called Child Expenses or something similar.
If you take that mindset throughout your entire budget it may seem daunting at the beginning. Don’t worry about it. Start somewhere and iterate.
After 5+ years of budgeting I can say that what I do now is drastically different from where I started.
Step 3 to creating a monthly budget: ensure there is a gap
Now that you know your income and the expenses you require for any given month its vitally important that you aren’t spending more than your making.
Like I said before its so important that there is eventually a gap here. That does not mean now.
It means eventually. Everyone starts somewhere. Trust me.
Monthly Budget Example
Here is a link to a monthly budget example. You’ll have to fill in the numbers but at least it will be a starting point for you.
I can’t emphasize enough that nearly everything about my budget has changed over the last 5 years. Everything from how I track it, when I track it, what I track, how I react to bad months, EVERYTHING!
Take a look at my example and start plugging in your own numbers. Keep your head up and decide that now is the time to start.