Personal budgeting 101 – how to create a budget

December 7, 2020

Creating and managing a personal budget is not difficult. It takes discipline and a good understanding of your expenses and how you spend money. Creating a budget plan and committing to it is simple if you know how to do it. Now is the time of year to prepare your budget for the upcoming year.

What does it mean to set a personal budget?

Let’s start simple. A personal budget is a detailed and itemized list of your earnings and expenses to help you plan how your money will be spent and your savings goals achieved. It can reveal your actual spending, and in many cases, you may not realize how much and where you are spending your hard-earned money.

How to create a budget

We strongly advise that you use a spreadsheet to manage and track earnings and expenses, but if that isn’t your jam, you will still need some instrument or process to determine where your money is going. Here is how it breaks out:

What is your income? The average American is paid 26 times a year. We advise that you build your budget from 24 of those 26 periods. Now, be disciplined and save the remaining two periods into a slush fund for emergencies or unforeseen expenses. Note: be sure to use your net income. You are not actually taking home your total annual salary.

Track your essential spending. This may take some additional time and thought because you are capturing all expenses, not only daily expenses.

  • Begin with fixed expenses– the expenses you know you regularly have. These include rent/mortgage, car payments, cell phone bills, utilities, and student loans.

  • Enter annual and seasonal expenses and divide by 12 (months). These include home maintenance expenses such as landscaping, pool cleaning, equipment maintenance.

  • Plan for big expenses such as vacations. If you plan to travel to Disney next year and estimate the costs to be $4800.00, add $400 per month to the spreadsheet. You will be happy you did. If you wait until 90 days before the trip and have not saved for it, you may turn to use a credit card, and that is a bad habit to fall into.

  • Enter your Variable expenses such as gasoline, groceries, and entertainment/movies/eating out. After a while, you will be able to observe an average cost.

It is no surprise that the largest expenses come from non-essential or discretionary expenses.

Does the expense bring you joy?

Discretionary or non-essential expenses deserves its own section! These are expenses that I refer to as the “expenses that bring you joy.”

  • Daily trip to the coffee shop for a latte

  • Gym Membership

  • Entertainment memberships: Pandora, Spotify, Netflix

  • Grabbing lunch from a local eatery every day

  • Visit the Nail salon/hairdresser

  • Shopping for new outfits, home décor, or treats

None of these ‘joyful expenses’ are terrible on their own. They become financially problematic when you do all of them all of the time. Ask yourself, “Am I really using the gym membership?’ or “Do I need both Pandora and Spotify?” Stop trying to be someone you are not and holding on to things that do not matter and trying to let go of things that do matter. If you love it, keep it in your budget. Just plan for it.

Choose the expense that brings you joy and let the others go. I bet you have recurring fees for memberships, online publications, and phone apps that you never use!

The spreadsheet is your friend.

We have several friends and colleagues who shudder at the prospect of using a spreadsheet for this purpose. I tell them to shudder now, and you’ll thank me later. The spreadsheet does not lie. It is in black and white, and you can clearly see your debt pitfalls that may need some adjustment. It will also allow you to know your monthly budget to help save money and achieve your financial goals. Tracking your spending and having a spending limit are also areas you can gauge.

Let’s talk about debt.

For this discussion, I will address credit card debt and interest loan debt. We refer our clients to a professional and trained financial planner for working on large debt:

  • Student loans

  • Car payments

  • Mortgages/second mortgages

Our preferred method of managing debt comes from Dave Ramsey’s Debt Snowball Method. Simply put:

“The debt snowball method is a debt reduction strategy where you pay off debt in order of smallest to largest, gaining momentum as you knock out each balance. When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance.”

Contact me directly for more information and to schedule a time to review your expenses and debt ratio.

Budgeting in the pandemic

No one could ever have imagined and prepared for the financial and economic impact of this pandemic. It does speak to the budgeting mindset of prepare for the worst-case scenario. Remember we talked about those two extra pay periods every year? Well, over the years, that slush fund grows and may provide some cushioning on expenses during a loss or reduction of income.

The habits you create now will benefit you and your financial life for years to come. This pandemic has strained our personal and business finances beyond our control. Seek professional legal advice or contact a CPA for a personal review of your expenses and finances.

It’s never easy.

Before you think that I was gifted one amazing budget and live life on an easy street with managing it all, I want to share with you my personal story. I paid for my education and graduated with student loans and credit card debt. When my husband and I got married, only one of us was working full time in a career. He too had loans from both a bachelor’s and a master’s degree as well as other debt. We lived off of very very little and got to work on our finances. To this day, my husband only gets paid for 9 1/2 months of work and I have to plan the entire year for that. We have kids now, a home, we have to own two cars, expenses are always on my mind, and planning for the what-ifs is pretty constant.

Your budget is not a set it and forget it.

Your personal budget and the handy spreadsheet is a living breathing document that needs consistent attention and care. I would be happy to share my spreadsheet template with you and schedule a time to discuss your personal budgeting goals. Send me an email, and I will send you the spreadsheet template. If you’d like to schedule an appointment, click here to view available times.