How to create a monthly budget.
There was a time when I didn’t know where my money was going or what should I do with it.
Needless to say, I was living from paycheck to paycheck and with credit card debt.
What I didn’t know at that time is that anyone can build a cushion, an emergency fund, even if it is small or starts from zero.
If you keep consistency and develop the right habits and systems, you will be able to see your emergency fund bloom; and a direct path to a better and more organized financial life.
One part of me never thought I would be the person writing how to make a budget. A budget sounded so “strict” to me. I used to think I could figure out on my own how to save money, without having the need to make a budget. Wrong. Or at least, it was for me.
I bet the world is so big that there are people who do not need budgets, and never had the need to use them; but for 90% of us, it is the best way to start.
The following are some tips that I learned on my way to developing a budget every month.
1. Income: Start by having a clear idea of your income streams. This can be very easy, because for most of us the need of a budget arises when we have just 1 income stream: our job. Or when we are spending more than we make, living paycheck to paycheck.
Get a clear idea of how many income streams you have, and how much are you making per month. Once you have this number, you should internalize that your expenses cannot exceed this number.
Yes, it sounds obvious; but it is so easy just to pay with the credit card since "we are getting paid next week, anyway". Wrong. This behavior will just make you live in constant debt. Debt seems like a snowball, it may start small but, it can become unstoppable. Make sure to compromise on living below your means and not borrowing money from your future self, future paycheck or credit card.
Just for clarity, credit cards are not evil, but you need to learn to use them, and many of us learnt this the hard way.
2. Where is your money going?. If you have a very clear idea of your variable expenses, fix expenses; the amount that you are spending in gas, subscriptions, eating outside; just skip to point 3. Otherwise, keep reading.
First, you need to figure out where is your money going, so you can create an accurate budget. This can be done in two steps.
a). Review the expenses of the last month through your checking account/ credit card statements. This will be particularly useful if you use your debit or credit card to pay everywhere; because they will be registered in your account. If you use cash and cannot remember how did you spend it, you should focus on the next step.
b). Track your expenses: It is not the first time that I mention how important it is to track expenses; it really makes a big difference. I recommend to anyone who wants to take a better look into their finances, as a main step. Try to get your expenses reviewed for the previous month, before start tracking your expenses; for the current month and the following month, for a total of 3 months. It doesn’t take a lot of time. It just takes half an hour per week or less. I normally do it on Wednesday’s nights. My best advice is to schedule it and go through the expenses in your account for the last week. You will be surprise at the kind of things you can find. Subscriptions that you forgot you are paying, maybe dining out 3 or 4 days in a row without even realizing it. Do not trust your memory, trust your bank statements.
Second; you should seriously consider some self-awareness work regarding money, if you think is need it.
Are you a compulsive shopper?, Do you spend everything in something specific (i.e alcohol, purses, shoes)?, Do you have childhood scripts regarding money?, What is your mentality about money, saving and living below your means?, Are you spending to impress others?.
Questions like that are difficult to ask yourself, and the answer can be painful; but this kind of self-awareness exercise will allow you to move pass your scripts and mental barriers regarding money, and how you use it.
3. Once you are very good at tracking your expenses. You need to define what is worth to keep or cut, what is worth to spend and what are your fix expenses.
Start by defining your fixed basic expenses, rent or mortgage, loan payments, etc.
Follow your fixed non-basic expenses like subscriptions, memberships, things that you pay the same value every month; but are not basic, and certainly you would cut in case of a financial emergency, such as employment loss.
Define your variable basic expenses, like food, gas, utilities. Since you have become a master at tracking your expenses, you can define an average value for such expenses. Keep these numbers in mind since they will be part of your budget.
Find your variable non basic expenses, for example shopping, dining out, entertainment, etc. This is sometimes called money fun category.
You don’t have to cut the variable non basic expenses from your life, you just need to define the right amount for you, to adjust them to your medium and long term goals.
4. Find a compromise between your current expenses and where do you want to be financially.
I recommend to avoid being tight at first. This can lead you to disappointment.
Start slow but consistent, cutting from your expenses and life whatever you don’t need and finding good replacements that make you happy. A subscription that you are aware you are not using; maybe cutting some bucks from fun money, cooking sometimes instead of dinning out, taking lunch to work some days instead of buying, are some examples of replacements that will save you a lot of money in the long run.
By this time you should have a very clear idea of your expenses and your spending goal for the month, or budget; although there are a couple of things to take into account to polish your budget.
5. Budgeting big purchases/ expenses: Sometimes you know you will have a big expense in the future; but you still do not bother about including it in your budget. I was this kind of person.
Including in your budget expenses that you know you will have, will save you many headaches and disappointments.
Birthday gifts, friends’ weddings, vacations, anniversary, renewal of documents are some examples in this category.
Before making my monthly budget; I take into account special occasions and how much I will spend on gifts. For February, I make sure to include in my budget some money for my dad’s birthday, for example.
It really helps, and provides a way to plan and have a systematized structure for future events.
6. Budgeting the unexpected:
It really helps to have some room for the unexpected; many people would just handle the unexpected by putting out money from their emergency fund. I think budgeting minor unexpected expenses is going one step further.
Basically, you just budget around 10% of your monthly income for unexpected situations, like a bill that you forgot (car registration renewal), a flat tire, a copay for the doctor if you get sick.
Of course, there will be moments when your budget for the unexpected is not enough to cover a big unexpected event, but taking care of the minor unexpected events is taking care of most of them.
If you find you didn’t use your budget for the unexpected during the month; you can add it to your savings, spend it, or roll it over as a surplus for the next month.
7. Pay yourself first:
Remember to include in your budget some amount for savings, it doesn’t have to be huge; but it has to be consistent.
Consistency is the key and the fuel for success.
Instead of keeping for savings whatever is left, take a double approach. Pay yourself first by putting money into your savings and at the end of the month, whatever is left, assuming you were under your budget, can be added to your savings as well.
8. Developing your budget.
By adding your fixed basic expenses+ fixed non basic expenses + variable basic expenses + variable non basic expenses + budgeted expenses + unexpected; you will have the magic number for your general budget.
Below are some examples of how it looks like.
9. Planning for a best case scenario will discourage you. The key is to try pushing yourself a little bit, by having smart purchases instead of buying impulsively, cutting out unnecessary expenses; but remember that life happens and sometimes we cannot control or avoid things to happen.
Planning and setting up your budget for a realistic scenario, rather than a best case scenario will take you further and make you happier.
You know yourself, and you know if you are likely to follow through the conditions you are setting up.
I remember when I started budgeting I didn’t include money for dining out or having deliveries at home. By that time, I was not cooking at all. It was a gigantic goal to be accomplished immediately. The first time I failed miserably, and when I finally had a month without dining out, I didn’t enjoy it.
I discovered that I do like to eat outside sometimes, and I included an amount for that purpose in my budget; most importantly, an amount that it is what I’m willing to pay, with awareness and living below my means.
10. Reward yourself when you get it right.
The feeling when you hit your budget consistently, and have room to start building and finally get that emergency fund or savings goal, it's just amazing.
Give yourself a pat on the back, reward yourself for the good work.
Compare yourself with your past self and see how far you have made it.
Leave some room for celebration.
Normally at the begging of the year when I’m setting goals, and including the budgeting goal, which essentially means to hit my budget every month, I like to include rewards for the progress as well.
Something like, if I hit my budget 3 months in a row, I will allow myself to have a day spa, or I will buy x thing that I have been craving for.
It is funny and at the same time gives you fuel to accomplish your budget goals.
Remember, there is no easy way to success, and to become the best version of yourself you have to put the work.
Good luck in your endeavors!
Link to the simplest budgeting and tracking sheet you will find: