Budgeting Your Money
I’m going to walk you through my step-by-step system on how to budget your money. This might be the most important thing you ever learn about finances. It sets the tone for your savings and investing strategy. The problem about most budgeting tools is that they are backwards looking. You set a budget for the month for several various categories. At the end of the month, you check your credit card statement and you have transactions from all over the place and can’t seem to figure out why you overspent.
What you need is a proactive FORWARD-looking budget that you keep up with in real time.
I’m going to be using an example of someone who gets paid 2x/month. If you get paid 1x/month it should be easy to translate this system to the way you are paid.
First, if you get paid the exact same amount every paycheck you will be able to automate this system to where you only need to check on it 1x/month. If your paychecks vary each time, it will require that you input your paychecks each time you get paid and then move things manually at the end of the month.
I break this down into the 1st of the month income + 1st -14th of the month bills.
- I plug in income, the savings number is automatically calculated via a formula, in this example I use 20% of income.
- Tithes/charity is automated with a formula of 10% of income if this is something important to you.
- I plugged a handful of static expenses – these are bills that happen every single month no matter what. I documented whether they get paid from your checking or credit.
Quick note, if you struggle with budgeting pay everything with your checking card for a while and stop using credit. Especially if you carry credit card debt month to month. Don’t try to justify the points you get bc they don’t mean anything if you’re being charged 16% interest and hurting your credit score. But I’d be a hypocrite to say never use a credit card. I believe once you get this system down I find that it’s ok to use credit ONLY IF you pay it off every month.
- The leftover line shows you the amount after you’ve done the important things: save, give, bills – now you get to spend
- Control expenses are what they say, it’s what you can control.
- For groceries/gas I try to average what I usually spend monthly and divide by 2
- For entertainment, this number is purely based upon what’s leftover and the last type of expense, dynamic expenses
- Dynamic expenses are random things throughout the year: gifts, vacations – I take a little bit out of each paycheck so that when these things come up I have money earmarked for them
- The sub account means that at my bank I’ve set up sub-accounts and labeled them whatever the expense is and on an automatic basis money gets moved from my checking into those sub-accounts
- This is how I know how much money I can spend on these things at any given moment
Leftover – this is to show you whether you’re in the red or black
- I have a leftover sub-account that this money goes to because every so often we overspend. It’s going to happen so when it does we pull money from the leftover account to make up for it
If you’re paid 2x/month you will layout the same process for your income/bills for the 15th – 31st of each month. At the end of the month, you should have something that looks like this.
As I mentioned, if you are paid the exact same, you can set up automatic drafts into savings, tithes, each of your dynamic expense labeled accounts and your leftover account. If your paychecks vary, you will have to manually move money into savings, tithe, and leftover but dynamic expenses should be automated still.
What about control expenses?
This is assuming you’re using your credit card. Remember how we had various categories earlier in the spreadsheet under Controlled Expenses: Groceries/gas, husband entertainment and wife entertainment
- You are going to use an App or Website to track these
- Link just your credit card to the app
- In the app you are going to set the budget for what you allocated for each of those expenses
- Groceries/gas: $1,000
- Husband entertainment: $1,000
- Wife entertainment: $1,000
- You don’t move the money anywhere, it stays in your checking account
- We’re also going to have a category for Bills that get paid on our credit card
- We will have a leftover account
Add all your dynamic expense accounts, in this example just Gifts and Travel
- For the leftover and dynamic expenses – we’re mainly using those categories to track what all gets spent in the various buckets in any given month.
- Since you set up sub-accounts for those, you can see at any point how much money is in there and whether you overspent or not
The app you’re using might look something like this, where at any given moment, you’re able to see how much you’ve spent and how much remains in each category:
In the app you should be able to label all of the sub-categories.
- Whenever transactions come up you can drag/drop them into the appropriate categories
- Your job on either a daily basis, weekly or at the latest monthly is to earmark the transactions to the correct categories
- Some apps allow you to set rules to where if the app sees that you spent money on your cell phone bill then that automatically gets earmarked into Bills
- The nice thing about this is at any given point you can pull up your app and click on Remaining to see how much money remains in each of your Controlled Categories before making spending decision.
- For going out to dinner or joint entertainment, we usually split those transactions which most apps will allow you to do
- At the end of the month, you should be able to go into the app and see how much you spent in each category
- When you go to pay your credit card here’s what will happen:- Add up the Bills and Entertainment sections and pay your card off from your checking
– If you spent any money in the Dynamic expense categories, Gifts or Travel, apply that amount to your credit card
– If you overspent, apply that amount from your leftover account to your credit card
– For the Dynamic Expense sections and leftover we have that money sitting in separate accounts so all you have to do is link those accounts to your credit card and send the money accordingly
- Lastly, let’s say you underspent (what?!)- You check how much remains and add that amount to your planned controlled budget for the next week, congrats!
Is this system hard to do? Sure, if it was easy we wouldn’t have $1 trillion of credit card debt in this country. But everything is hard the first time you try it. Once you get it down it maybe takes 2 hours of your time per month. One of the number one causes of stress in a relationship is money. If you implement a good budgeting system not only will it improve your overall financial situation, it may just be the thing that saves your relationship.
Financial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation. 2373415/1-2019