Money Monday: How to Create and Use a Simple Budget

A woman upating her household budget

Aimee Bennett Unlock Technologies staff writer

Key takeaways:

  • Before you start creating your budget, think about the endgame and your goals.

  • You don’t need any fancy software to create and maintain a budget. Pen and paper or spreadsheet is fine. Whatever helps you best, use it.

  • Do the math: compare your income to your monthly bills, note the difference and set aside some for savings.

Budgeting. We all know we should do it. Most of us have good intentions to do it. But actually doing it? That’s often another story. The problem is that “budgeting” has become associated with restriction, akin to dieting. Many, if not most, people think it’s designed to set limits on what you can do, making life difficult. The reality is that budgeting is the No. 1 best path to doing and achieving what you really want in your life. The key is to begin by putting away the spreadsheet, app, or pencil and paper

Begin with the end in mind

Instead, start by thoughtfully figuring out your goals, both short-term and long-term. This will take some time, and goals will be different for each person, couple and family. For some people, shorter-term goals might include such things as taking a vacation, buying a new appliance and making sure their schedule allows time for a favorite hobby or daily exercise. Longer-term goals might include retirement, funding a child’s education and buying a house. If you have a spouse/partner and/or have children, be sure to go through this process together.

Once you’ve agreed on a set of goals, and written them down, you’re ready to create a budget – around your goals. Approaching budgeting this way means it will have real meaning, and assure you are working toward something, versus restricting yourself.

Understand that when you do start incorporating your goals into your budget, you may very well find that your resources and goals don’t quite match up. Then it’s time to modify – and maybe make some compromises with family members. Maybe your planned hiking vacation moves from a big trip to Yellowstone to a state park, or your hoped-for marathon changes to a 10K. Or, if you really do not want to shift a goal, you might find yourself looking at how you can generate additional income. Whatever choices you make, though, you’ll know that you are moving in a positive direction.

Do the math

A budget can be very simple. Use the tool that’s most comfortable for you, whether it’s a spreadsheet, app, online program, or pencil and paper. Similarly, many different budgeting models exist. One simple technique is to follow these four steps.

  1. Total your monthly net household income (the amount left after taxes and other paycheck deductions, such as health insurance premiums and retirement plan contributions). This will be what you have to spend during the month.

  2. List ongoing monthly expenses in four areas. Together, they will total your cost of living.

  • Fixed expenses: expenses that stay the same every month (such as rent or mortgage payment), and regular payments to pay down debt

  • Variable expenses: expenses that change each month, but are “must-buy” items (including food, gas and medicine)

  • Savings: an expense, or bill, to yourself

  • Discretionary: your spending money

  1. Subtract expenses from income. If the result is negative, no matter how hard it is, you must find ways to increase income or decrease expenses. If the result is positive, but still doesn’t get you to those goals you’ve set, you must do the same thing – or modify your goals.

  2. At the beginning of each month, you can write down how you will spend your money during the month. That’s the budgeting process.

  3. An additional way to track your spending comes from Bank of America and their 50/30/20 rule:

The 50/30/20 rule is a method to help track your spending.

Paying off debt – and paying yourself

One of the four expense categories is for debt. Make sure you itemize all debts, including credit card debt, student loan debt and personal loan debt. Keep in mind that paying off high-interest credit card debt – the debt that plagues most people – is one of the best investments around. Plus, not carrying credit card debt is a financial cushion in itself. Whatever method you choose to pay down your debt, make sure to include the payment amount(s) in “fixed expenses” for the month. Similarly, include savings as a “bill” to yourself. Whether you are saving $10 a week, 10% of your income or other, choose what you can do consistently and treat it as an expense.

Budgeting does require some effort. But disciplining yourself with goals you set makes saving and spending smartly much easier.

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