by Sarah Eadie

How to Budget

Woman looking at books at a bookstore.

Budgeting can be mentally and emotionally hard. Basic arithmetic is scary enough without throwing your sense of self worth into the mix. But if you’re making enough money to cover rent and pay your bills, and still never feel like you have quite enough, it may be time to dig in.

But even those of us who know it’s time to start budgeting will put it off. Unfortunately, when it comes to money, avoidance leads to more aggravating problems down the road.

When you’re not taking control of where your money goes each month, it doesn’t matter how much more you make. Your unconscious spending habits will grow to fit the gaps. This actually feels more frustrating because on paper you’re making more money, but you still feel like you’re treading water.

I won’t lie to you. Budgeting does involve some thought and effort. The hardest part is just working through your budgeting fears and anxieties and getting started. You won’t believe me until you try, but:

Budgeting can be decadent. Does “decadent budgeting” sound like an oxymoron? It’s not. A good budget doesn’t just help get you back on track financially. It also empowers you to get more of what you love. Once you’ve paid bills and put some money into savings, the rest is yours. Your money is a tool. Put it to work for you.

The best budgets are easy. There are budgets for every personality and situation. Take time to find one that works for you. If budgeting seems like a chore, it means the budget you’ve chosen isn’t for you. You shouldn’t feel like you’re a complete failure who deserves financial ruin.

Failure is OK. You have to be bad at something to get better at it. It’s ok not to hit your budgeting goals the first time around. Turn your failure into improvement. The places where you mess up are neon signs pointing to opportunities to improve.

What a Budget Actually Does

In its simplest form, your budget should help you do two things. Just two!

  1. Your budget should help you spend less than you earn. If you’re spending more than you earn, your budget isn’t working for you.
  2. Your budget should help you spend money on what you value. Put more money towards what matters, and less towards things that don’t.

As long as your budget helps you do these two things, you’re killing it. Go you.

How to Budget Your Money

Step One: What Do You Want?

Shut off your computer and phone. Get rid of any other distractions. Take out a pen and a piece of paper. Think. What brought you to this place of wanting to make a budget? What do you want to get out of your budget? Write down the answers that come to you.

Some of the things you think of might be pretty negative. Sometimes it takes a financial catastrophe to get us to change our financial ways. But to create powerful goals, you’ll want to keep it positive.

If you find yourself writing things like this:

  • “I don’t want the thought of my student debt to keep me up at night.”
  • “I never want collections to interrupt my workday with an embarrassing phone call.”
  • “I’m tired of having to say no to exciting opportunities because I can’t afford them.”

Try reworking them into empowering alternatives:

  • “I want to aggressively pay off my student loans.”
  • “I want to be confident that I can pay my bills on time, and in full.”
  • “I want to be able to chase opportunities that come my way.”

In addition to the things that make you feel overwhelmed, think about the aspects of your life that are underwhelming. Indulge your inner green-eyed monster and think about things that make you especially jealous.

Example:

  • “How did he afford those shoes?”
  • “Why can’t I buy expensive dinners a couple nights a month?”
  • “Unbelievable! They’re going on vacation again!”

Rework these into positives, too:

  • “I’d like to afford a really nice pair of shoes every couple of months.”
  • “I’d like to be able to treat myself to occasional expensive dinners.”
  • “I’d like to save up for a big vacation or two this year.”

Congratulations! You now have a list of goals and values to help you develop your budget. Starting from this place of figuring out what YOU want – how YOU want to shape your financial future – will help you create a budget you can feel good about.

You’re not listening to anyone else’s interpretation of how you should live your life, but you’re not hiding from reality either. You’re on your way to a well-balanced budget.

Step Two: Where Are You Now?

Note: If you’re reading this, I assume you’ve already taken the time to track your spending. (You haven’t? Please stop reading. Yes, right this second. Bookmark this tab, then go read this post where I break down best ways to track your spending.)

Start by looking at how much you make each month. Personally, I’ve always been surprised at how my hourly rate or annual salary have translated to the numbers on my paycheck. You may find yourself surprised, too, to see what $15 an hour or $75k yearly looks like in monthly earnings after taxes.

Now, take note of what spending categories surprise you, or make you feel guilty. It’s common to have a particularly negative reaction to the amount you eat out or go drinking. Remember, don’t beat yourself up about it. We’re going to use this guilt as a guide.

Also notice the categories where you wish you were spending more. Compare the spending in these categories to the notes you made earlier. Did you buy a game that you really loved in the past three months? Could you move money from other categories to cover another game or two each month? Would that make you feel happier? You can budget for that.

Step Three: Imagine ‘Perfect’

What would a perfect month look like, financially?

Take your monthly income and start subtracting money for different expenses in this order:

  1. Needs. These are the items at the base of Maslow’s pyramid – food, shelter, health, and other basic resources.
  2. Shoulds. Think about the money things that contribute most to your anxiety; the stuff that keeps you up at night. These are expenses like student loan payments, emergency funds, and retirement savings.
  3. Wants. This is where decadent budgeting comes in. These are items you’d love to spend more money on; that you’d be happy to know you’re saving up for.

Unless your Needs + Shoulds = more money than you make each month, you can probably eke out a couple of extra bucks for the things you love. So do it. Move those dollars around until you’ve assigned every dollar to something necessary, something responsible, or something cool. (Refer to your Step 1 goals if you’re feeling uninspired.)

Look at the difference between your perfect month and the reality of your past several months. What would it take to make them the same?

Using an Incremental Budgeting Plan

If your perfect fiscal month and your current financial reality are $50s or $100s of dollars off in each category, you’re going to need to take some extra time to slowly, gently guide your spending habits from Point A to Point B.

Do this by adjusting the spend in each category by $10 - $50 at a time. For instance, if you routinely spend $800 going out to drinks each month, and you’d rather be contributing some of that money to your IRA, an incremental budgeting plan would look like this:

Month Alcohol & Bars Spend IRA Contribution
January $800 $0
February $750 $50
March $700 $100
April $650 $150
May $600 $200

And on and on, month after month, until the spend in both categories is where you want it.

You don’t have to cut your alcohol spend by 100% if you don’t want to. In fact, you probably shouldn’t. You’re more likely to be successful if you do things gradually. Adjust each category to a place where it feels comfortable on a day-to-day basis while also furthering your financial goals.

There are many tactical ways of accomplishing this type of budgeting, too many to cover in a single blog post. Don’t stress too much about choosing the ABSOLUTE BEST method of budgeting right now. You can always adjust it later. The most important thing is to find a method that works for you and stick to it.

Budgeting Tips

  1. Set realistic goals
  2. Dreams are free, but setting realistic goals can help you put enough money aside to help you achieve your dreams. Start small, and give your budget room to breathe at first, just in case something comes up.

  3. Know the difference between "need" and "want"
  4. Setting the difference between "need" and "want" can help you understand the best ways to spend your money. Do you really need to eat at restaurants three times a week? Or would a couple of meals in be okay?

  5. Underestimate your income
  6. Underestimating your income can add a few dollars to your back pocket each pay period. Round your net income down to the nearest one, 10 or even 100 dollars, and you've instantly given yourself a buffer for emergency expenses and savings.

  7. Overestimate your expenses
  8. Overestimating your expenses can be hard. We all want to think that we're being frugal with our spending, but little spending decisions add up. When you're building your budget, overestimate these small amounts, and you'll have a workable solution if and when your spending jumps up.

  9. Budget for unexpected expenses
  10. Make sure to budget for unforeseen expenses, which can take you (and your bank balance) by surprise. Having a buffer of savings in your account can help keep you out of debt or dipping into other savings Goals.

  11. Reevaluate your budget when life changes
  12. As life changes, so should your budget. If you change jobs, homes or even utility providers, don't forget to update your budget to reflect that. Even small price changes can have an effect on your budget.

  13. Allow room for errors or transgressions
  14. Mistakes happen, so don't paint yourself into a corner with strict, unworkable budget. Keeping some room in your budget for that random expensive night out, or bill you forgot to prepare for, can help you in the long run. Exercise forgiveness with yourself, and you'll be set to stick to your budget in the long run.

    Go forth, enlightened spender

    Hopefully by now you understand why budgeting is important, and how not-scary it is once you get started. You now also know the secret of budgeting which is that (beyond making you fiscally responsible) it empowers you to do things you’ve always wanted to do. But I may not have converted you. If you’re still not convinced that budgeting is a great tool for accomplishing your financial goals, [let me know](mailto:stories@simple.com)! I’d love to hear what leaves you unconvinced that budgeting would work for you.