{Edited Update: 01/01/2024}
Money management should be a college course requirement.
A short, 1-credit course, but a course nonetheless. I remember taking the Home-Economics class in high school, where we glossed over budgeting and things like credit for a week. I don’t blame the teacher for lack of explanation. It was only meant to be a basic exposure, plus she still had to follow the curriculum.
Now, having lived on my own and jumping into the deep end, I can say that I was not nearly as prepared as I thought I was.
When it comes to accumulating wealth, there’s an old saying: “It’s not how much you make, it’s how much you keep.”
Too many people get wrapped up in the idea of “more, more, more.” It’s easy to see why too. So much of our daily life is based on how much we can afford and what we can afford to do. Get a job. Make money. Spend the money. A simple formula, but an incomplete explanation on how you’re actually supposed to save and budget.
If you’re sick and tired of wondering where your money goes every time you open your bank account, worry no longer. I’m going to provide 7 logistical steps for starting, building, and maintaining a budget.
Pre-Steps: Start Thinking About Financial Goals
As with all vital parts of life, you need to know why you’re doing what you’re doing. Do you plan on saving for retirement? What about investing? Are you living paycheck-to-paycheck in the hopes that you’ll magically get hit by a bus and collect the insurance payout. (In all seriousness, DO NOT commit fraud).
Do you have aspirations to own your own business, travel overseas, or be able to donate a large sum to charity? If you’re just looking to avoid the poorhouse, that’s perfectly okay too. Or maybe you just want to be able to provide your kids all the things you never got as a child.
Whatever your reason, write it down and have it with you when you start budgeting.
Step 1 – Block Out Time to Budget
Before you start scribbling down all your bills, make sure you set aside enough time to do so. Ideally, the more time you allow yourself to go through the books and review your finances, the better. If you don’t have that kind of time, shoot for one hour minimum.
Don’t worry if your life is hectic at the moment. If budgeting your money really means that much, you’ll find the time to do it.
If you have kids, see about getting a baby sitter. If you need to take care of an ill family member, see if you can recruit some help from friends and/ or family. If you have ornery pets, crate them, or be in a room where you can close the door. Rid your area of any distractions like cable TV. Put your phone on “airplane mode,” and resolve not to call/ message anyone while you do this.
If you’re required to be on call, do the best you can with what progress you make, then get back to it ASAP. If you have ongoing correspondence with a dating or business partner, let them know that you’ll be occupied and not to be bothered. Redirect all emergencies to a second in command. If you can’t, stress the importance of calling, if and only if, it’s a true emergency.
Don’t Forget to Involve Your Spouse
That’s right. If you two have decided to become a team, you need to act like one.
According to this 2018 Forbes article, “money” is still the #1 cited reason for divorce. {As of 2023, “financial stress” dropped to #4}. David Bach, financier and (currently) twelve-time NYT best seller, says that money is often a point of contention due to the involvement of trust and power. He says, “… if you’re not in the boat together, rowing in the same direction, it’s not a once-a-year fight, it’s constant.”
Having mis-aligned goals, or no goals, means unclear reasons for saving in the first place. What’s the money for? Are you (two) spending it accordingly? Is your partner spending in conflict with your beliefs? These are the unconsidered questions that lead to relationship erosion and/ or the passive-aggressive competition.
Now, David doesn’t recommend couples do a budget together, but instead to “automate [their] financial life,” by putting away an agreed upon percentage towards retirement. I don’t recommend this, for two reasons.
- If neither of you ever bothered to make a budget, chances are you don’t know if you have the extra money to invest in retirement. Retirement is great, but so is having a roof over your head and food in the fridge. It’s better to know if there’s a leak in the boat before you start rowing.
- Even if you decide on the amount to set aside for retirement, there’s still limited communication about what goes where. You might think you guys need to spend more on groceries. Meanwhile, your spouse just renewed the HBO subscription. At the very least, you should listen to each other’s desires about where you want the money to go.
A Different Perspective
Instead, check out this article by Brett and Kate McKay, a real life couple. The advice is tailored towards newly-weds, but is still applicable for all couples. Basically, figure out each other’s financial status, then figure out financial goals. Once established, decide if you’ll have separate or joint accounts or both. Then make the budget.
Brett also adds that you guys should pick one of you to take the lead. Preferably, this is the person who has the most interest and aptitude to do so; the person who’s more likely to remember to pay the electric company. It’s not glamorous or fun, but it’s still important for both of you to be aware and have a say.
If you do end up arguing over the budget, take a break, calm down, and hear each other out. Your reasons might be valid, or they might not be. Point is, you’ll need to compromise on some things if you’re going to make this work. Remember to use the phrase, “I feel.” This isn’t the time to pick each other apart.
*Note: If things get really bad, consider if there’s underlying issues that need to be addressed. Better to deal with some “healthy arguing” now, than a messy divorce down the road.
Step 1.A – Get Help If You Need Help
If math isn’t your strong suit, or you’ve worked yourself up into a tangle of knots over budgeting, enlist the help of a family member, friend, or financial adviser. If your spouse is better with numbers, have them double check the calculations. Your local bank is also equipped to help you form a plan for financial fitness.
Step 2 – Compile a List of All Income
Don’t worry about the numbers for now, just make a list of any form of income. For most people, it’s their job. For others, it might include money they made from stocks, real estate, royalties, affiliate programs, etc. Write down a list in one column.
Don’t include things like “birthday/ Christmas money.” Keep gifts as bonuses.
Step 3 – Calculate Your Income
After you’ve made your list, start figuring out your gross, monthly cash inflow.
If you have a salary, take that number and divide it by 12. For example, if your salary is $48,000 a year, then your cash inflow is $4,000 a month.
If you’re hourly, the easiest way to calculate your inflow, is to take your hourly wage and multiply it by the average number of hours worked per week. For most, this is 40 hours. So if your wage is $15/hr, your weekly cash inflow is $600.
If you work for a commission, it might be a little harder to have a set number, but it’s not impossible. You can still get a ballpark estimate based on your average sales per week and/ or month. For example, If you make 10% on a sale of $500, then your commission is $50 per sale. Therefore, if you make an average of 50 sales per month, then your cash inflow is $2,500 per month. If you make a base rate, use the same formula for hourly employment.
Don’t Forget About Taxes
Hate to remind you, but this is all before taxes. Meaning, your gross income isn’t an accurate representation of what ends up in your pocket. To figure out how much you actually net, you need to look at your pay stubs. If you don’t know, a pay stub is an official document that details your earnings and taxes.
What tax bracket you’re in depends on your filing status, if you claim dependents, and any deductions/ exemptions.
To get a broad scope of how much you pay in taxes, you need to know your gross earnings and total taxes. To calculate your tax percentage, divide your total taxes by gross earnings, then multiply by 100. For example, if you make $500 a week and your total taxes were $100, then your tax percentage is 20%. (($100/$500) X 100).
Remember, you’re only looking for an average here, so go back through your last few pay stubs to get a feel for a constant number. After you’ve found your average, round up. If you’re tax percentage was something like 19.37%, round up to 20%. If it was 23.11%, round up to 24%.
Once you’ve calculated your gross, monthly income and tax percentage, you’ll have a better picture of what goes into your pocket each month. You’ll also have a better idea if you’re in trouble or not.
Overtime and Bonuses
These are to be treated as extra. Remember, companies aren’t required to provide overtime. In fact, according to the IRS, full-time is considered 30 hours per week, not 40. And this is only to determine who’s eligible for minimum coverage. Technically speaking, there is no federal standard for full-time employment, according to the U.S. Department of Labor.
Don’t go spending your money in anticipation of overtime only to be told there won’t be any. You and only you are responsible for your finances.
Step 4 – Compile a List of All Expenses
This list is usually longer, much longer. It’s all the bills and little extras that seem to never go away. Again, don’t worry about the numbers yet.
Start with fixed expenses. This is the phrase I use for things that are weekly and/ or monthly occurrences. These are the bills like rent, utilities, phone, insurance, food, gas, etc. It also includes things that aren’t necessities like cigarettes, coffee, haircuts, and eating out. Bottom line: if you pay for it week-after-week, month-after-month, it’s a fixed expense.
Next, write down your variable expenses. These are the things that you know you’re likely to buy, just not as often. Maybe you treat yourself to a pizza every so often, go out with friends, or get a manicure every other month. Perhaps you notice a book you’ve been wanting to read or a movie you’ve been wanting to see. Bottom line: write down stuff you’re likely to get, but could easily not get.
Note I said, easily. Don’t try to convince yourself those cigarettes are a variable expense when you know d*mn well they aren’t. Either figure out how to quit, or resign to putting them in the “fixed” column.
Step 5 – Calculate Your Expenses
There isn’t as much math involved here, just a lot of checking and double checking. For your fixed expenses, you’ll usually receive a billing statement, whether paper or electronic, with the exact amount. Always round that number up. If your car insurance is $116.71, round up to $120. If you spend about $28.10 a week on gas, round up to $30.
A good rule of thumb when it comes to budgeting: under-estimate your income, over-estimate your expenses.
For your variable expenses, you’ll need to save your receipts and/ or check your bank statements to keep a running tally of what you buy and do. You can keep it old school with pen and paper, or you can make an excel spreadsheet in Google Drive (for free too!).
Create different categories to organize your spending habits. When you separate your items, it shows you precisely where your money goes. You might not have realized you’re spending over $50 on takeout each week, but there it is on paper. When you know where your cash flows out, you can better plan ahead and plug up any holes.
Step 6 – Put It All Together
Remember how I asked you to write down your financial goals and have them with you? Now, you’re going to use it.
After you calculate your cash inflow (income) and outflow (expenses), subtract your expenses from your income to see how much you can potentially save each week and/ or month.
In the Red
If you find yourself in the negative, you need to start trimming expenses you don’t need. Go through your list, and see which ones you’re willing to sacrifice or downgrade. It won’t be fun, but it’s necessary. People delude themselves into thinking they can’t get ahead. Meanwhile, these are the same people who’ll spend money on brand-name clothes, expensive coffee, or a second car.
Some people like to live large, and they ignore the fact that their wallet can only support so much. A small house still provides shelter. An older junker still gets you from point A to point B. Thrift store clothes are still wearable. And cheap, simple meals still fill your stomach. It’s all about perspective.
Look at the goal you’ve written down. Ask yourself, “Is the cost of my financial goal worth the price of [insert unnecessary expense here]?” Budgeting is for the short term and the long game. You need to be able to pay your bills and eat, but you should also steer towards your financial goals. You won’t get there by spending all that money in the now.
In the Black
If you’re able to cover all your expenses, terrific! That means you’re not falling behind (assuming you’re not piling up credit card debt). But even if you’re not falling behind, that doesn’t mean you’ll be able to get ahead.
Living paycheck-to-paycheck doesn’t just apply to those in the lower economic class. It applies to anyone who spends as much as they earn as soon as they receive it. It’s how doctors, lawyers, and celebrities can be flat broke while making hundreds-of-thousands to millions of dollars.
The sentiment falls down the ladder too. People on the upper rung will wonder how millionaires could ever be in debt. People on the lower rung will wonder how those who make $80,000 a year can’t figure out how to pay off $40,000 worth of debt. And people who are still trying to get on the ladder wonder why anyone complains so long as they have food to eat and a dry place to sleep.
Again, it’s all about perspective.
You might not like your financial situation, but someone in a much less fortunate circumstance will see you as blessed.
If you are living paycheck to paycheck, or you can’t save as much as you’d like, you have a two options.
Scale Back Your Expenses
If you’re able and willing, consider downsizing your living situation. If you own a car, see if you can sell it in favor of cheaper transportation. Go through your bank statements and check if you have any recurring payments to stuff you don’t use that much.
You’ll need to make a lot of sacrifices and give up some comforts, but if living within your means is important to you, you’ll find a way to do it.
Increase Your Income
If you’re more than happy with your employment situation, then focus on cutting expenses.
Otherwise, look into either moving up, or moving out.
If you love your place of employment, but not so enthusiastic with the pay, look for ways to add value to the company. You can take classes to increase your skills and abilities, or you can go to the School of Hard Knocks and work your way up.
If you’re not happy with your place of employment, think about why. Are you following your dreams? Or did you just fall into your job? Figure out what you love doing, then figure out how to get paid for it. Whether it’s formal or informal, educate yourself into working at a job you love or, at the very least, can tolerate.
Alternatively, you could look towards creating passive income.
Passive income comes from sources that require minimal upkeep to generate money. These are things like royalties from movies, music, or books. It’s the kind of thing that pays you while you sleep. The trade off is that it requires a lot of hard work in the beginning. Many people get discouraged and quit because they don’t see immediate results.
It could also be the dividends you’ll receive from investing. Likewise, many people either aren’t aware of or lack the discipline to invest in stocks that yield a return. Or they invest all their eggs in one basket and watch helplessly when it inevitably crashes.
Passive income is like a fruit tree: when you plant the seed, it can feel like forever before it grows, but once it does, it bears fruit for a long, long, time. So plant the seed now, and get to watering and weeding.
I repeat. If you’re not willing to put in the time and effort (about 6 months to a year) before you see results, then passive income is not for you.
Step 7 – Review and Maintain On a Monthly Basis
After you’ve established your net earnings and laid out a plan to save, go over your budget every month (or week or day if you like) and make adjustments accordingly. If you see you’re still spending too much on coffee, cut back or find a cheaper shop. If you’re spending too much on television subscription(s), cancel until you can reasonably afford it.
Be sure to periodically check in with your spouse if you plan to make such changes. You still want to be aware, whether it’s them or you, of what’s happening with the money.
Take whatever you have left and do as you please; invest, save, donate, the choice is yours.
And that’s about it.
Figuring out your cash in/ out flow is the key to building and maintaining a budget.
If you’re wondering how much you should be spending on fixed expenses, stay tuned.
One Last Thing: The Scarcity Mindset
Be wary of falling into the scarcity mindset. This is the penny pinching, the miserly, the Ebenezer Scrooges of the world. Don’t run around your house unplugging every unused appliance to try and save a few cents on electricity. Likewise, don’t deprive yourself of life’s joys because you’re so focused on saving money.
Sometimes it’s better to go on that date, get that present, and take that trip, than to wonder years later if you should’ve.
