Budgeting 101: How to Create the Perfect Budget

Budgeting Diagram

Budgeting is the most important practice for your road to becoming wealthy and financially free. A budget is a money management system that will help you to optimize your spending, save money, and productively use every dollar. In essence, a budget will put you in charge of your finances. Budgeting should not give you a scary thought or be extremely time-consuming. It is almost effortless, and it works wonders on relieving financial stress.

Creating a budget has many financial benefits:

  • Saving more money
  • Knowing where you can cut spending
  • Creating goals for each dollar you earn
  • Minimal to no financial stress
  • Building effective financial goals
  • Staying focused on financial goals
  • Staying financially organized

The Basics

To start on our budgeting journey, we will look at money in three basic ways.

Money for Expenses

Expenses are what you have to pay for every month in order to live in a comfortable manner. Expenses are the first thing you will put into your budget because they are at the top of your priority list. These are the things that you literally have to pay for.

Common expenses are:

  • Rent or Mortgage
  • Utilities
  • Insurance
  • Internet
  • Cell Phone
  • Debts and Loans
  • Gas
  • Groceries
  • Housing Necessities (Trash bags, toilet paper, toothpaste, soap, etc.)
  • Pets (Dog/Cat food, litter, treats, etc.)
  • Subscriptions (Netflix, Spotify, Apple Music)
  • Memberships

Money for Saving

You should try to dedicate at least 20% of your monthly income to savings or investing. On top of this, you should have a goal for your savings. (An emergency fund of three months worth of expenses should be your first goal). Once you reach this goal, you should allocate the money to another type of savings goal such as for a down payment on a house.

Money for Other Categories

After your expenses and savings, the rest of your income should go to other categories. These categories may include fun money, clothes, movies, restaurants, dates, bars, and anything else your heart desires. The caveat is each category having a pre-set allowance. When you reach your limit on a certain category, it is time to go without it for the rest of the month. Do not be worried, though; this is a lot easier than you think. Next month you can go to the movies, to the bar, or buy more clothes. This month, you must stick to your budget and realize that you depleted that category. Next month you can make smarter decisions and not buy a bunch of clothes on the first day of the month. It does not have to be strict. A budget is a permission to spend, but you still need to be smart about it.

How to Budget Effectively

Business Woman Balance

There are a few different types of budgets, but we recommend a zero-based budget. This type of budgeting is raved about by Dave Ramsey and makes every dollar you earn put to good use.

The main problem with this system is that if you use every dollar, you make in a month, you end up with no money in your checking account. Luckily, this usually is not a problem because of what you end up doing with your dollars.

  • Most people that start their budget are not going to have $0 in their account when they start it. So, if you start the month with money, you are going to end your month with the same amount.
  • You are going to end up saving more than you ever have in your life.
  • Many times you will find yourself not spending every dollar that you budgeted for at the end of every month.

Step 1: Add your monthly income.

Money Income

Write down every way that you expect to make money in the month and how much money each source will create. The total of these sources is your total income for the month, and you will allocate each dollar to a specific category.

Example:

Monthly Income:

Paycheck 1: $1800

Paycheck 2: $1800

Side Hustle: $200

Monthly Income: $3800

Step 2: Calculate your Savings/ Investments.

The reason we want you to do this before you identify your expenses is the importance of saving or investing as much money as you possibly can. Saving and investing is the basis of wealth building and becoming financially free. When you budget your savings first, the rest of your spending will be more thoughtful. You will stop overspending on things that you do not need.

Take at least 25% of your monthly income and dedicate it to your monthly savings. You can always adjust this once your budget is complete. (Some people cannot afford 25% and must go lower which is okay. A little is better than nothing.) Usually, you will find that you can save more than you thought. For now, we want you to pay your future self first. Your future self will be extremely thankful later. Now, subtract this amount from your monthly income.

Example:

Savings Calculation:

Monthly Income: $3800 * 25% (0.25) = $950 for Savings

Step 3: Identify your Expenses.

Rent or Mortgage Expense

Look at the list under the “Money for Expenses” subtitle to get an initial idea of what your expenses are. Don’t forget to include your Netflix subscription, Spotify subscription, gym membership, or any other common monthly expense you have.

Write down each expense and the amount of money dedicated to each of them. Subtract the sum of your expenses from your total at the end of step 2.

Example:

Monthly Expenses:

Rent: $1200

Utilities: $120

Car Insurance: $50

Health Insurance: $70

Renter’s Insurance: $15

Cell Phone: $60

Student Loan: $225

Gas: $75

Groceries: $250

Spotify: $10

Netflix: $15

Gym Membership: $25

Monthly Expenses: $2115

Step 4: Figure your Other Categories.

After savings and expenses, you may be surprised or disappointed with how much money you have leftover. If you are already negative, you need to lower the percentage of your savings or find a way to make a little more money.

The amount of money you have leftover can be spent however you would like it to be. However, only put what you need or expect to pay in each category. Don’t allocate $1,000 to the bar each month just because that is what you have left.

You still need to be thoughtful and decide how much you need to spend on your other categories. The point of this is to save money and cut down on the things that you spend too much money on and not to set yourself up for overspending on worthless categories.

Example:

Monthly Income: $3800

  • Savings: $950
  • Monthly Expenses: $2115

Total Money for other categories: $735

Other Categories:

Clothes: $100

Fun Money: $150

Blogging: $50

Personal Care: $100

Restaurants: $150

Charity/Church: $50

Total Expenses for Other Categories: $600

Amount Left Over: $135

As you can see, we still have $135 leftover. We can either add another category or allocate the money left over to something else.

Step 5: Check Back on your Savings.

If you were really thinking about how much you need to spend on your other categories, you may still have money left over. Guess what we are going to do with it?

Take any bit of money you have left after step 4 and if you guessed that we are going to put it all back to your savings category, you got it. All of a sudden, the percentage of income you are saving has jumped from 25% to possibly 30%, and you are even better off than you were before.

It is the small steps and extra amounts of savings and investments that are going to help you reach your financial goals faster than you could have imagined. This difference is why we try to cut back every month and allocate more to our savings. We think it is much more exciting to allocate money to our savings than to buy a few new pairs of shoes. This excitement is the type of mindset that is going to lead you to riches.

Example:

Amount Left Over: $135

Initial Savings: $950

New Savings: $1085

New Savings Rate: 28.5%

Step 6: Develop or Find a Budgeting Tool.

Budgeting Tool

Before you search for a budgeting tool, write steps 1-5 on paper or in a spreadsheet. This commitment will set your budget in stone and make you think a little harder about where you are allocating your money.

After your figures are set, we recommend using a budgeting tool. The tool we like the best is Every Dollar. It is completely free, has an app for your phone, and makes tracking all incomes and expenses extremely simple. It is a program developed by Ramsey Solutions and Dave Ramsey.

If you want to search for others on your own and find one that is right for you, there are plenty of other free tools online.

If you do not want to use a pre-made tool, you can always use a spreadsheet and set it up to do all the calculations for you.

Step 7: Input your Numbers.

Take everything from steps 1-5 and put the numbers into your selected budgeting tool or programmed spreadsheet.

Congratulations, you have completed your first monthly budget. Well… Kind of.

Step 8: Keep Track of any Incomes or Expenses.

Throughout the month, you need to keep track of every one of your incomes and expenses. Put the amount of each transaction into the category that applies.

Example:

Incomes:

Paycheck 1: $1834.21

Expenses:

Gas: $28.34 – Gas Category

Costco: $122.87 – Grocery Category

Bar: $ 12.94 – Fun Money Category

Haircut: $21.12 – Personal Care Category

If one of your categories reaches its max allowance, no more spending on that category for the rest of the month. Your budget will show you where you can and can’t spend your money, but it up to you to hold yourself accountable. As we have said before, a budget is not a restriction, but permission to spend money on what you want. Just don’t spend too much.

Step 9: Review and Edit your Budget Monthly.

Review and Edit

At the end of every month, you want to look back and see if your budget went according to plan. Most likely, you will find that it did not go according to plan. This realization can be a good or bad thing!

Perhaps you didn’t spend as much money as you thought you were going to in certain categories. You can adjust this amount in the next month and may allocate more money to savings. Maybe you found a way to make more money than the previous month. You are going to have more money to allocate to your budget!

On the flip side, you may have spent more on a category than you thought. Sometimes, that is okay. For example, you may have gone on a long road trip and spent more on gas than you had expected. This unexpected expense is completely normal and okay, make sure that it was not unnecessary and adjust your budget to match accurate values.

“Month after month, your budget will become refined and more useful at helping you keep track of your money.”

wealthywhisper.com

Step 10: Save Money and Cut Expenses.

Over a long period, you will be able to save more and cut expenses. This change is the ultimate goal of a budget and the reason it is highly effective in mastering personal finances and building wealth. However, this is only one of the steps to building wealth. You will learn that you cannot live without budgeting and will start to build a passion for it. The results will be surprising to you. You will be in control, stress-free, and on your way to becoming financially free.

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Jakob Freele

Wealthy Whisper is written by MBA students that are passionate about wealth building, personal finance, investing, and becoming financially free. Everything we learn will be written about on Wealthy Whisper and our goal is to help people with one of the most important aspects of their life... finances.

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