Life is pretty crazy now and I, for one, feel like everything is spinning out of control.
When this happens, I like to go back to the basics of what I can control in my life. Creating a budget is the first step in taking control of your life. Here is how to make a budget that actually works.
Money gives you choices in life. Taking control of many aspects of your life begins with taking control of your finances. The first step is making a budget. Sometimes it is hard to know how to make a budget that actually works. There is a lot of confusing advice out there.
Personal Finance Is Important.
People who live in poverty don’t have control over their lives. They don’t have the peacefulness in their life that they need to make decisions that move them forward. They literally can’t afford to plan for the future and make the best life choices.
Living paycheck-to-paycheck with no financial plan, even if you are not getting out of debt, does not allow you the financial freedom you need to live your life the way you want.
You Need To Make a Budget.
The absolute first thing you have to do when you are taking control of your finances is to make a budget. That’s right- a BUDGET. A personal budget. You need one. You need one written down. Not only that- but it needs to be a budget that WORKS. A budget that only deals with the money you actually have and not the money you think you have or the money you wish you have.
At the risk of sounding condescending, I am constantly amazed how many people do not have a simple budget. They sort of keep track of their money or, worse, write down every single thing they spend but have no clue how to make a budget.
You need to make a budget even if you are not making ends meet and your expenses outweigh your income.
A Big Budgeting Mistake
There is some prevailing advice out there in the world that says that when you are trying to get your financial life in order, you should start keeping track of where you spend each dollar. I sometimes see personal finance writers suggest this.
This is a fallacy. This is the wrong way to start.
I don’t care where you spend your money. You don’t need to know where you spend your money. All you need to know is that you did not spend more money than you should have. The only way to actually do that is to have a budget that tells you that.
A big problem I see is that people get very excited about starting to be responsible with their money and start writing down everything they spent. .25 on coffee. $10 on gas. $5 for a gift. $150 on groceries. Whatever, I am just writing down numbers.
The point is, by the end of the day, they have a list of where they spend their money and… nothing else. Tracking your expenses is not budgeting and does not take the place of having a realistic budget. Knowing how much you spent is not helpful unless you know how much you can spend.
There is no roadmap. No guidance. You look at the list and say, oh, now I need to save money on groceries, or I guess no more coffee for me. But why? What rules are you following? What actionable decisions are you making?
Besides, tracking down your expenses is so tedious and time-consuming that only real money nerds enjoy doing that (which is great if you are a money nerd!). Chances are, you will get tired out and just quit.
Definition of a Budget: knowing where your money needs to go and then putting the money there
That means you need to know where your money is supposed to be before making any decisions and corrections.
Having a budget clarifies what you need to do to make your money work for you. Knowing the upper limit of your spending and knowing the minimum amount you need to make can help you make choices and decisions about your money.
The only way to make sure you are spending your money wisely is to know how much you can spend.
Knowing that you spent $2 at Starbucks isn’t the information that helps you. Knowing that you have $100 to spend on whatever you want does. Throwing money at your credit card debt without understanding how much money you have will not help you.
When we make decisions, we need to know the facts. Extraneous information bogs us down and doesn’t help us streamline our decision-making process. Know the basic facts before trying to figure out the rest.
What Basic Facts Do You Need To Know?
How much do you make?
How much do you need to spend each month or year?
How much you are allowed to spend?
Figuring out those three things is how you make a budget. That’s it. You don’t need fancy apps or a free budget calculator to get started. That can come later when you want to optimize and improve what you are doing. But to get started? You need simple. You need clear. You need to know.
After all this information is clear to you, then you can figure out all the rest of the details- how much do I want to save?
What do I want to spend my money on? How much more money do I need to get what I want? What money-saving measures can I implement to help me save the most?
All the frugal tips, hacks, tricks, and advice in the world will not help you if you don’t have a basic idea of how you need your money to work for you. That is only accomplished by making a budget.
How To Make a Budget That Works
1. Calculate Your Income. How Much Do You Make?
If you are a gig worker or have a fluctuating income, you should either round to the best of your ability or make two budgets- one for a good month and one for a bad month.
2. Calculate Your Fixed Expenses.
Your fixed expenses are how much you spend a month on things that are not easy to change: rent, daycare, minimum debt payments, and other fixed bills.
3. Calculate Your SPending Amount
Subtract #2 from #1. This is the amount that you can spend on other things.
That is it- that is how you make a budget. After this first step, you can drill down and figure out how to increase the money you make, decrease your fixed expenses, or maximize what you can get from your spending.
I like to use the modern envelope budgeting system to track what I can spend, but each person will have to choose what budgeting system works for them.
Whether you follow your budget or stay within your budget is a totally different issue than actually making a budget. Additionally, I don’t spend time categorizing each purchase or trying to move things from one envelope to another.
As long as I stay within the budget, it doesn’t matter what the money is spent on. Who has time for more work or more fretting and agonizing?
But I already have a budget!
Great! Awesome! Even if you are like me and have a particular budget that you follow every month, it’s a good idea to revisit your budget, savings allocations, and new needs. After all, life happens, and things change.
Now is a great time to look at your budget and reevaluate if it is still working. Are there new sinking funds you need to start? Are you able to raise your savings or your charitable giving? Do you have adequate retirement savings? Now is the time to make this happen.