HOW TO CREATE A BUDGET THAT ACTUALLY WORKS

Do you ever feel like dealing with your finances head on can be one of the most overwhelming things in the world? When I first realized just how much student loan debt we had, all I wanted to do was bury my head in the sand and hope that it would all just disappear. Have you ever felt that way? Maybe you are likewise in debt and it just feels too big to manage. Or perhaps you’ve tried to get your budget in order, but it failed. Maybe the problem is that you’re not quite sure how to create a budget that actually works.

Most of my life, my philosophy on creating a budget has been, “don’t spend money, ever.” Or, to put it more accurately, “always try to spend the least amount of money possible on anything.”

Think this Saturday Night Live Skit with Steve Martin and Amy Poehler:

There are obvious problems with my former theory. In life, we simply have to spend money on some things. And without a set budget, it is hard to know how much to spend on the things we need. Without knowing how much money we should realistically be spending, it is difficult to ascertain how much “extra” money we have.

In addition, it is not always the best idea to spend as little as possible on things. For example, if you buy the cheapest toilet paper, you end up using twice as much (or more), and in the end, spend more than you would have, had you purchased higher quality toilet paper. We are currently experiencing this cautionary tale.

As soon as my husband and I set the goal of paying off six figures of student loan debt, it became clear that we would seriously need to set a budget. Every dollar in our budget has to count so that we can make the biggest payments possible, in order to achieve our goal within five years. The problem is that there were so many different theories and ideas and methods that we had tried that just didn’t work for us. What we needed was to create a budget that actually works.

I’ve researched several different methods on how to create the best budget. I’ve experimented and tinkered with strategies that help us actually stick to our budget. What I’ve found is that most budgets are needlessly complicated. So, I have simplified the process that we personally use into 6 easy things that you can do to create a budget that actually works.

 

STEP 1: START TRACKING ALL EXPENSES

The first thing you should do to create a budget that actually works is to start tracking every single one of your expenses, immediately. It is difficult to set a budget if you have no idea what is practical for you. For example, do you know how much you are spending monthly on electricity? Do you know how much you are spending on food? If you don’t, when you create your budget, you will have to guess a number that you think will work. And the chances are, you are going to guess wrong. And then you are probably going to fail at your first attempt to budget because you probably will budget way too much or way too little. And then you will probably abandon the notion of a budget. At least that is how it has seemed to go for us over the years.

Ideally you want to be able to set a budget that causes you to exercise some restraint but that is not completely crippling. Having an understanding of where you are at currently helps this.

In addition, tracking expenses actually helps you spend less money. Have you ever tracked your calories before? Studies have shown that even if you are not trying to lose weight, tracking your calories helps you consume less. The same principle applies to tracking your expenses. If you are constantly aware of your money and what you are spending, you will spend less.

STEP 2: START TRACKING INCOME

The next thing you should do on your quest to create a budget that actually works is to start tracking your income from every source. This could be very basic if you are a one income house hold who is given a salary. It gets more complicated with dual incomes, hourly wages, and multiple side hustles.

For us, we were really surprised how much we were actually earning each month when we added up even our smallest of side hustles. For example, we get cash back with companies like Ibotta. We also take online surveys and get reward points with Swag Bucks, to name a few of our little side hustles.

As we started calculating all of our income, it became apparent that we were earning money, we just didn’t know where it was going. This is exactly why living on a budget is important.

STEP 3: SET GOALS

We have talked in detail about goal setting in our newsletter, but basically, if you don’t have a goal for your finances, you are much less likely to actually stick to your budget. Why? Because your budget is your plan for how you will achieve your goal. Goals do not come into fruition by happenstance, most of the time.

So, take some time and consider what your financial goals are. Do you want to pay off student loan debt? Do you want to get out of credit card debt? Do you want to invest? Do you want to achieve financial independence? Would you like to retire early? Do you want to have more money? Less? (if so, please send some to me). Would you like to travel more?

Goals are awesome. And it is practically a known fact that they work better if you write them down. If you share money with anyone (spouse or a significant other) sit down and write out your goals together. If you are sharing money, you must get on the same page.

You may have more than one goal. As an example, some of our goals are:

1. Pay off our student loan debt
2. Buy a house with more than one bathroom (or build one on to this house).
3. Have enough money to give a lot of it away. We’d like to create scholarships, among other ways of giving.
4. Invest in real estate and other small business ventures
5. Buy a beach house
6. Save enough for a comfortable retirement, should we choose to retire.
7. Have enough discretionary income to take planned and spontaneous vacations, many times per year.

Remember, “a goal without a plan is just a wish.” Your budget is your plan to reach your goal. You have to create it and then you have to live by it in order to reach your goals.

STEP 4: SET YOUR BUDGET

So, now that you have some goals, where do you start? How do you create a budget? More importantly, how do you create a budget that actually works? There are several theories and ideas about how you should set your budget, each more complicated than the last. I don’t know about you, but I don’t need anything else to complicate my life. I need a budget that is easy to create and easy to follow. That is why we have come up with what I will call the “goal setting method.”

The goal setting method is simply a trial and error method. Based on prior spending, you set a goal for how much money you would ideally spend in each of your categories of spending. For example, after tracking our spending for a few months, we noticed that we were spending about $600 a month on food for the three of us. That seemed like a lot, so we set a goal to spend $400 a month on food.

We went through every category of spending that we have and did the same thing. We were spending about $175 on utilities and we thought we could easily move that down to $150, so we set our utilities budget to $150.

THAT IS IT. No fuss, no muss. Just tracking your spending and setting small goals to spend less.

There are several apps and online tools you can use to help you set your budget. We personally have used Mint and Personal Capital and think both are great options. The only downer with Mint is that you have to frequently re-categorize some of your spending. Not a huge deal since you will be reviewing your budget and spending once a week (more on that later) but it can be a little inconvenient.

But, if you are less of an app person and more of a excel spread sheet kind of person, Bank of America has a budget planner that you can download here: Household Budget Worksheet.

The point is that you just need somewhere to record your budget and track your spending to see how well you are doing in each category. Apps are preferable to us because it does a lot of the work for us.

We set an overall goal for our budget each month of $3000 on all spending per month. That number is fleshed out into every category of spending (i.e. $400 of that goes towards food). We personally do not include our debt in our budget because anything above $3000 that we earn goes to student loans first, but we are in a somewhat unique situation paying off $600k of debt in 5 years.

DISTINGUISH BETWEEN GOOD AND BAD AUTOMATIC PAYMENTS

(AND SET THEM UP ACCORDINGLY.)

Once you have created your budget, you should distinguish between fixed payments (payments that stay the same every month, like your mortgage or rent) and payments that change every month (like gas and electricity).

If the option is available, all of your fixed payments should ideally be set up on auto-payment. Many companies offer some financial incentive for doing so. You should be taking advantage of that. On the other hand, you should not enroll in automatic payments for your bills that vary each month.

And here is why: having to see your bill each month and make the payment yourself helps keep you reminded that you have a goal of spending less and helps you stay on track. On the other hand, payments that are fixed, as in, you do not have the ability to control how much you pay each month, might as well be set on auto payment. So set up the “good” (fixed) automatic payments and get rid of the “bad” payments (variable).

STEP 5: HAVE WEEKLY MEETINGS

Once you set up your basic budget, the most important thing you will do is to start having weekly money meetings. In my opinion, these meetings will make or break your budget. They are the difference between creating a budget and creating a budget that actually works. If you are married or have a significant other to which you are financially accountable, you should sit down each week with that person. If you have no one to which you are financially accountable, you will sit down with yourself. Bring some snacks. You will review all of the money that you spent that week. Did you meet your goals? Did you overspend? Is there any where that you can cut costs? You will review all of this. This helps keep you accountable to yourself and or to your significant other.

For us, we sit down every Sunday night after we put M down to bed. Sometimes, this meeting is the last thing on earth that I want to do, but every week we do it and we are always glad we did. It is incredibly motivating to keep us both on track. It is an important time to figure out what is working and what is not.

But is doing this every week really necessary?

I know some people do this once a month or a few times a year. While that is better than never, it is not going to help your monthly budget if you are realizing spending problems that could easily be addressed to save your monthly budget that month. Moreover, this meeting serves as a good reminder to pay off credit cards, bills, and or other financial obligations. Cause late fees are the WORST. All of things usually need to be addressed on a weekly basis anyway, so might as well do it together.

STEP 6: TWEAK YOUR BUDGET AS NEEDED

Finally, a budget is really a work in progress. It is going to require some tweaking and changing to get it where you need it to be. Don’t be afraid to change up your budget if something is not working. This is another benefit of your weekly meeting– you can use that time to change your budget as needed. Creating a budget that actually works really all depends on YOU. You are the only person who can control your spending. You’re the only one who can control how much income you are bringing in. You’re the only one who knows what you really need and how your budget can be tweaked so that it actually works for you.

You CAN create a budget that ACTUALLY WORKS FOR YOU. All it takes is a little tracking, goal setting, and tweaking. I know that you will find that living on a budget is incredibly empowering and allows you to meet your financial goals.

Three cheers for creating and sticking to your best budget yet!

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