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This post was updated and republished on June 18, 2018.
When you hear the word budget, what comes to mind?
Perhaps you cringe, thinking it is meant to keep you a prisoner to your finances. Or maybe you think that it’s way too much work and would take too much time to even think about doing. It could even be a “tried that, didn’t work” thought that crosses your mind and so trying to budget again is something you have no intention of doing.
My hope is that when you hear that word going forward, anything negative no longer comes to mind. Instead, I hope you think of the word freedom.
Why budgeting is important
Budgeting isn’t meant to hold you back. In fact, it is meant to be a tool to give you more freedom to do what you want with your money. It is meant to help free you of your debt so you have more money to save and use for better things. And it frees you from overspending and getting into financial trouble.
When you budget, you become a manager of your money instead of your money managing you. And when you can stay out of debt and save money, so much stress and overwhelm will lift off your shoulders!
Creating a budget may sound like a lot of work and more trouble than it’s worth, but I would like to show you it really is worth it in the end and is much easier to do than many people think.
If we spend about 30 minutes in the beginning getting it going, the rest of the time there are a lot fewer steps when it comes to budgeting.
So what are we waiting for? Let’s get started!
I am going to help you create a budget. This method can work if you have been budgeting for awhile or are a budgeting beginner.
For simplicity purposes, I am going to help you create this budget asking you to use a sheet of paper and writing it down. Afterward, you can either continue to use your sheet and write down your budget, or you can transfer everything to an app, Excel, or some other budgeting software. Everyone has their preferred method so find what works best for you.
Now, if you have not yet done so, take out a sheet of paper and a pen. Or you can use a budgeting template I created. (I am hoping to have more budgeting worksheets soon!)
When creating a monthly budget, we are going to make it for the upcoming month. So if it is currently June, you will be making a budget for July (side note: if it is early in the month and you have not yet made a budget for the current month, do so!). You should always create your budget near the end of the month, for the following month.
Now, at the top of your paper, write down the name of the month you are creating the budget for.
Create a budget step #1 Record Monthly Income
Write down a category titled “Income.”
List the household income you will be receiving for the entire month of July, after taxes. Make sure to include how much everyone in your household will be bringing in, if the income is shared.
This is the amount of money you are going to work with. From this total, you will delegate how much goes where. The delegation is really the foundation of setting up a budget.
Variable incomes can make budgeting a little more difficult. My guess is that people with variable incomes tend to budget less often than those that know exactly how much they will be bringing in every month, just because it’s not as easy. And believe me, I understand! I used to be a substitute teacher so I had absolutely no idea how many hours I would be working in the upcoming month. I often didn’t know if I would even work until the day of.
If your income varies from month to month, write down the lowest possible amount your paycheck could be.
Create a budget step #2 Tithe, Donate, and Save
For the next category, title it “Tithe, Donate, And Save.”
If you don’t do all three, then just title it whichever one(s) you normally do.
If your family tithes, then that is something you most likely want to do before saving or paying anything else. So write down how much money you are going to be tithing.
This would also be a good place to determine how much you will donate during the month, if anything at all. This may go along with tithing or something you do completely separate from that.
The best save money tip I can possibly give you is to budget!
Budgeting makes your saving intentional and helps you determine how to save money by spending less in other categories.
After you designate how much will be going to tithing and donations, determine how much you will save that month.
If you do not yet have your full emergency fund ($1,000 until debt is paid off or 3-6 months of expenses if you have no debt) all of your savings should go toward building that. If you have your $1,000 all saved up, then everything extra should go toward toward debt until that is paid off. If your debt is paid off, then continue to save for your 3-6 month emergency fund. Then you can start saving for other things!
What people often end up doing is waiting until the end of the month and saving whatever money is leftover. But if you decide up front how much you will save and immediately put that money into a savings account, you will be much less likely to spend it.
Now total the amount of tithes, donations, and savings and subtract it from your income. The difference is the amount of income you have remaining to continue budgeting.
Create a budget step #3 List Out Expenses
Expenses are everything that you are going to be paying for in a given month.
Write down a category titled “Fixed Expenses.”
This is where you will write down everything you have to pay in the upcoming month that has a set amount. This could be bills such as rent/mortgage, cable, and your car insurance.
Only write down amounts that do not change from month to month but stay exactly the same.
Write own a category titled “Variable Expenses.”
Here, write down expenses that do change from month to month. These don’t usually change by much, but you may not know exactly what they will be until you get closer to the month. So for now, write down the highest amount you have had to pay for them so far, until you receive the bill and can adjust it.
These can include your electric, phone, and water bills.
Write down a category titled, “Debts.”
Your debts are most likely going to include both fixed and variable amounts. For example, I have some debts I owe where the amount does not change from month to month. Other debts, like credit cards, do change from month to month depending on the total amount of how much is owed.
Write all of your debts down and the minimum payments due for each one. If you don’t know how much will be due, write down the highest amount you have had to pay for it so far, until your bill arrives and you can correct it.
I like to have mine listed in order of smallest debt to largest, especially if using the debt snowball method to pay it off.
The debt snowball method is when you pay off your smallest debt first by putting extra toward it every month and only paying minimum payments toward every other debt. Once that small one is paid off, then you start paying extra toward the next largest debt (including what you were putting toward the previous debt you just paid off) and pay only minimum payments on every other debt. This pattern continues until the last debt is paid off.
Write down a category titled, “Subjective Expenses.”
Subjective expenses are ones in which there is no set amount or bill you will be receiving for them, but you still need to pay every month. These include items like fuel, groceries, and household items.
These are subjective because you need to determine how much you are going to spend on them every month.
We currently set our grocery budget for $250 a month. How much you set it for will depend on how big your household is and how you like to grocery shop. For example, if you meal plan based on sale items, shop at discount stores, and find ways to cut back on meals, your budget may be a little smaller than someone that likes to shop on the fly.
When you set these subjective amounts, know that they will likely need to change after the first month. It can take a couple of months to find an amount in each category that works for you and your family.
Write down a category titled “Miscellaneous Expenses.”
There are always going to be things we need to spend money on that we forgot about or that come up last minute. For example, a birthday gift, a school field trip, or an unexpected ticket.
Set aside some money each month so you have it ready to go for when something does comes up.
Now total up all of your expenses and subtract that from your remaining income. That is how much you have left to work with.
Create a budget step #4 Put Extra Toward Debt
Write down a category titled “Extra To Debt.”
Take a look at how much money you have remaining to budget. Is there anything extra you can put toward debt? If not, I would suggest adjusting some of your subjective categories where you can so you can begin to pay down debt. If your grocery budget is $400 for the month, maybe you can try and make it on $350 or $375. Every little extra toward debt helps!
Subtract that amount from the remaining income total. That is how much you have left to work with.
Create a budget step #5 Put Money Toward Entertainment
Write down a category titled “Entertainment.”
While it can be tempting to want to put money toward entertainment before anything else, it really should be the last thing you put money toward, especially if you are in debt.
Entertainment can be eating out, going to the movies, or paying for a concert.
Determine how much will be going toward this and write it down. Then subtract that amount from your remaining income.
Are you in the positive, negative or at zero?
Take a look at your remaining income after all of your expenses and everything you are putting money towards.
Are you over your income? Under? Or are you right at $0?
The goal is to be right at $0. That is what a zero-based budget is.
If you are negative, you will need to adjust some of your subjective categories. The first places to start would be entertainment and miscellaneous.
If you are positive, then decide where you want to put that extra money. I would start with debt and savings.
If you are at $0, then way to go! You are at a zero-based budget!
A zero-based budget means you have told every penny you earn where to go. This is your way of controlling your money instead of your money controlling you. What power! What freedom!
Other budgeting tools
Although I suggested starting out your budget by writing it down on a piece of paper, many people end up budgeting electronically.
I used to budget using an Excel spreadsheet, but now I use EveryDollar by Dave Ramsey. I love this app!
Although there is a paid version, you can get a basic version for absolutely free, which is exactly what I use.
It takes your previous month’s budget to create the next month and can easily be adjusted where necessary. You can input all of your expenses and the amounts and then easily record whenever you spend money. It tells you if you went over your budget or how much you have remaining in each category.
If you don’t want to use this app, I still highly recommend making sure you have some sort of spending tracker where you can compare your spending to your budget. If you don’t know how well you are staying within your budget every month, then your budget is almost useless.
It’s important to remember that your budget will not always stay the same from month to month. Expenses and income change, which is why you need to review it with your spouse/significant other and have regular conversations around it.
Also remember that the first few months will be trial and error, and you will likely need to adjust your budget until you get it set up in a way that works best for you and your family.
Once your budget is set, the most important part is that you stick to it. When you do, you won’t be spending money on anything you did not budget for.
Budgeting gives you a way to take ownership of your finances. You become a money manager instead of your money having control of your life. You make sure every penny goes where YOU TELL IT TO and not the other way around. Now that’s freedom!
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