Perhaps you’ve tried creating a budget before. It can become tricky and overwhelming very quickly. Creating a realistic budget you can stick with is even trickier. Keep on reading to learn how to create a budget.
My History With Budgeting
For some reason, budgeting has always come naturally to me. I had never realized how difficult it can be for other people until I met my husband.
When my husband and I were first moving in together, I had us take a quick several-hour seminar that my bank offered about budgeting.
I had known that money would be tight when we first moved out so I wanted to make sure we had a handle on everything.
We followed the tracking for about a month and then once I had a handle on my share of the expenses, I quit the process. I knew what I needed to do.
I assumed my husband did as well. Turns out, he didn’t. In the tightness of our budget, he continued to spend like he had when he still lived with his parents and had no significant other expenses to pay for.
It led to tons of credit card debt that I then had to help him dig out of…several times.
What I learned throughout the process is that you can’t force someone to follow a budget. The person has to be willing and ready to maintain their budget on their own.
Below we’ll be talking about how to create a budget you can stick with. We’ll go over some of the budgeting basics including how to set up a budget as well as how to determine your values when it comes to spending.
What Does Money Mean to You?
Something I hadn’t considered until about a year ago was that each person has different values when it comes to money.
At a high level, there are two drivers of these values – freedom or safety.
Safety
In the safety mindset, people value the security that money has to offer them. They typically prefer saving more money and having a bit of a security fund for in case something goes wrong.
These people are more likely to value slowly saving up to make a larger purchase and are more likely to be able to set aside money and not spend it right away.
Freedom
Those with the freedom mindset aren’t so worried about the security of money. They want to be able to live their life full of freedom and enjoyment. They tend to splurge on those large purchases or experiences they want to have in their life.
They view money as their way to independence and having that life they want. They don’t necessarily see the need to have that money in savings because they know eventually, they will get more money to pay for what they want.
Set Your Goals
Both the safety and the freedom mindsets briefly mentioned above have their benefits and consequences to them.
The safety person may never spend money on themselves, thus not fully enjoying all life has to offer. The freedom person may get into a negative situation where they can’t pay for unexpected medical bills.
However, having a good balance between both safety and freedom is probably the best mix.
Based on your values, you need to set your goals on what you want your budget to look like.
Example goals could be:
- Saving towards a new car
- Having a set amount of money for you to spend as you’d like each month
- Creating a “safety net” savings account
- Paying off credit card debt
Whatever you decide your goals should be, make sure they align with the type of lifestyle you want to live. If not, it will be difficult to stick to your budget.
Budgeting Basics
Simply put, creating a budget takes the amount of money you take home each month and then subtracts out all of the items you have to pay for within that month.
If you have extra money, that is great, if you don’t have enough money for all the expenses, it creates issues.
For purposes of this post, we’ll talk about a monthly budget, but you could do it weekly if you prefer.
What Income Should I Use?
Income is the amount of money you make within a month. Income can get tricky when people get into gross and net and what all of that means.
Even being a CPA, the gross vs net confuses me from time to time. What I like to think about when budgeting, though, is the take-home pay.
Take-home pay is what you actually get in your bank account when you get paid.
If you want to learn about net vs gross, you can check here.
What Are My Expenses?
Expenses are anything that you have to pay for over the course of a month, or even a year. For purposes of budgeting, you should take everything into account, no matter how small it may seem.
It’s amazing how quickly small amounts can add up over time if you don’t account for them all.
The big items you’ll want to take into account are mortgage or rent, car payments, and utility payments.
Then you have the more irregular expenses such as groceries, clothing purchases, pet food, various subscriptions and the like.
You’ll also want to take into account any expenses you only have to pay once a year such as home insurance, renters’ insurance, car insurance, and license plate renewals.
For these types of expenses, I like to divide them by 12, so they are split evenly in each month. Then I make sure that the extra money is set aside each month to pay for those expenses.
However, if you’d like to create a separate budget for each month of the year that takes into account those fluctuations, you can do that as well.
Wish List Items
You might ask, what are wish list items? They could be anything you’d like them to be.
Ideas for this would be extra savings if you want to create a safety fund of money for emergency expenses.
It could be including a monthly amount to set aside to be able to pay for your children’s Christmas presents.
It could also be something larger such as setting aside extra savings for a new vehicle or a new house.
These wish list items will be included with your expenses as you create your budget.
Put it All Together
I like to use excel when I create my budget, so that’s the method we’ll discuss here.
Income
At the top of the tab, I put the amount of money I take home each month. Make sure you take into account how often you are paid.
If you get paid twice a month, add together the amount of money that goes into your bank account for both paychecks and put it into an income cell. Similarly, if you get paid weekly, you’d take the 4 paychecks you’d get in the month and add them up and put that total into the income cell.
Expenses
Within that same tab of the excel spreadsheet, create a section that lists out all of your expenses. Make sure to include anything you might pay for during the course of the year, so it is an all-inclusive list.
The tricky thing here is to make sure you are including the monthly amounts, not the entire years’ worth of payment. For anything you might pay for quarterly or annually, you’ll have to do the proper division to get it back to the monthly amount.
Wish List Items
You can put your wish list items just below your expenses on your excel spreadsheet. It is nice to have them a bit separate from your actual expenses in case you do need to cut them later.
Final Steps
In a cell below your income, expenses, and wish list items, put in a formula that takes the income line and subtracts out all the expenses and wish list items.
If you have an amount remaining, this is good and you have some extra money you can save or do something else fun with.
If you are right on, that is okay and you are still in good shape.
However, if your expenses and wish list items are higher than your income, you’ll have to figure out a way to either increase your income or decrease your expenses or wish list items.
What If My Expenses are Larger Than My Income?
If you have higher expenses than your income, you’ll have to take a serious look at your budget, otherwise, you’ll end up in debt or unable to pay for things. There are some options, however.
Increase Your Income
One option if your expenses are higher than your income is to increase your income. You could do this by taking on a second job. Another option would be to try selling some of your stuff to help.
If you can swing the extra hours, getting a second job is a good option to look at as a long-term solution. Selling your stuff would only help for so long until you have nothing else to sell.
Reduce Your Expenses or Wish List Items
The first area to reduce your expenses is to reduce your wish list items. If you can’t pay for the bare bones, then you won’t be able to save up for the items on your wish list at this time.
Depending on how much you need to make up for, you may need to cut a portion or all of your wish list items.
If you still have more expenses you need to pay for, you’ll have to start looking for those non-essential items to cut. These would include spending on clothing, take-out food, internet streaming services, and any memberships.
Non-essential items are those items that are nice to have, but you don’t actually need to have. It could go as far as getting rid of the internet and downgrading your cell phone plan to save money.
Other ways to decrease on expenses would be to get new quotes on insurance that you have or negotiating with your cable or internet providers to get a lower rate.
Groceries are another large expense. Ways to save on groceries would be to clip coupons and to buy off-brand products. You can also create your shopping list by viewing the sale ads and base your meals on what is on sale for the week.
Bigger changes could be things such as finding a lower-cost place to rent or selling your house and downsizing.
If you’re still having issues, you can reach out to local services in your area. Around here, we have a group called FISC that helps people consolidate and pay off their debts by working with companies to come up with payment schedules.
How to Create a Budget You Can Stick With
Now that you know the basics of what your values of money are and how to create your budget, let’s combine those concepts.
The way to stick to your budget is to create a budget that follows your values.
If you value the safety that money has to offer, you’re more likely to be conservative in your budgeting. You’d want to budget more money to put into savings for when you need it. It’s also likely that you’d have less money to spend on yourself for clothes and other enjoyment purchases.
If you value the freedom of money, it is likely that you enjoy being able to spend your money. You’ll want to make sure that you can afford your expenses.
However, with your extra money, it is likely you’d rather spend money on your hobbies, eating out, or something else that brings you joy. You may also be interested in doing a little saving for something that you’ll enjoy, such as taking a trip or buying that cool new vehicle.
The key on how to create a budget you can live with is making sure that your budget follows how you want to live your life.
While you want to be able to afford your expenses, you also want to make sure you’re enjoying life the way you want to.
That can mean something different to each person. One person may have a goal to have a set amount of money set aside in a rainy-day fund. Another person may value having a cute and up-to-date wardrobe that they love.
You just need to create your budget with your own values and goals in mind. If you do this, you’re more likely to stick to it.
Grab the Budgeting Spreadsheet
If you want to make budgeting even easier, click below to grab the FREE budgeting spreadsheet. It is an easy-to-use template with pre-filled formulas to calculate your budget.
It will help bring your budgeting to the next level by listing out possible expenses and calculating everything for you!
