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Budgeting 101

1. Determine why you want a Budget

You want to define goals before you start the process, since the reasons you’re budgeting may impact choices you make during the process.  Creating a budget makes it more likely to achieve your goals because the process of figuring out the numbers creates an emotional investment, enhances motivation and discourages cheating.  Common reasons to start a budget include:

  • Start a savings account
  • Reduce overspending on problem areas
  • End fights about money for couples
  • Make sure your spending reflects your goals and values
  • Break the paycheck to paycheck cycle
  • Avoid spending money you don’t have
  • Get out of debt
  • Stay on track toward long term financial goals

2. Do a Deep Dive into Current Spending Habits

Before you can create a realistic budget, you need to know what your current spending habits are. If your budget isn’t realistic, its just a wish list. To figure out a realistic budget, track you spending habits for 30 days to get a clear picture.   Ways to track your spending include:

  • Enter your expenses in a spreadsheet or note book – This is the most hands-on approach and can take time. Keep receipts when you make a purchase and write it them in your notebook or add to your spreadsheet at the end of the day. You want to track your purchase as soon as possible so you don’t forget.
  • Use an App – An App can help organize your spending into categories because you can link your credit cards and bank accounts. The following are some mobile apps:
    • Mint is free and offers the option to create a budget
    • Dollar Bird is free. Cost to upgrade to the Pro Plan is $2.17/month or $25.99/year
    • PocketGaurd is free. Cost to upgrade is $3.99/month or $34.9/year.
  • Use statements – Credit card and bank statements can help track your spending. This approach is less like to produce detailed results.  The reason is because you may not remember what a particular transaction was for. If you want to get started right away, you can use 1 or 2 months’ worth of old statements to give you a big picture as a starting point.
  • Use a Calendar to Catch Irregular Expenses - Irregular expenses are those that do not happen weekly or monthly such as:
    • Holidays
    • Birthdays
    • Annual car inspections and registration
    • Vacations
    • Annual insurance premiums and taxes
  • Annual medical expenses or vet exams

3. Add Up All of Your Income

    • Wage income
    • Money from side gigs
    • Alimony / Child Support
    • Investment/Savings income

Note:  If your income is variable, the best budget approach is a Pay Yourself Salary by using 3 or 6 months’ worth of income to do a monthly average. There are multiple ways you can estimate a Pay Yourself Salary:  Base your salary on what you would typically earn in a bad month to build a bigger cushion and reduce the risk of overspending, or, do a monthly average and any extra money coming in you would save in case of a bad month later.  Another approach would be to live off of last month’s income. You would have to base each month off of the prior months income that was earned and update your budget each month.

4. Identify Your Personalized Financial Goals

  • Saving for retirement
  • Building an emergency fund
  • Buying a house
  • Purchase a vehicle in cash
  • Paying off debt
  • Saving for college
  • Saving for a vacation or other big purchases


5. Align your budget around achieving the goals. Decide how much you need to set aside to accomplish each goal.

Setting goals is the most crucial part of making a budget work. If you don’t use your budget to work toward your goals, you’ll shift your spending and not have any results in the end.

  • Be specific - Instead of “saving for a house”, your goal should be “save $5,000.00 for a down payment”.
  • Include Deadlines - When do you want to buy that house, purchase a car, retire, or send your kid to college? Set a target date for achieving your goal.

6. Schedule a Household Meeting

Money is a leading cause of relationship stress. If you aren’t on the same page, you’re attempts to budget will not work. If you maintain separate finances, you will want to make partner aware of your budget so they can understand why your spending habits may change.

7. Avoid Common Budgeting Mistakes

  • Unrealistic Expectations - Setting a budget you can’t actually stick to will set you up to fail.
  • Budgeting Based on Gross Income - Using your net pay, the money you take home minus taxes and deductions, should be used for budgeting.
  • Failing to Consider Big Changes - If you plan on having children, buying a new car, or moving to accommodate a new job, then you should consider these significant changes as you establish your budget.  Ideas for cutting back to accommodate a large expense can include cancelling cable TV, giving up eating out, selling your car with a high monthly payment for a less expensive one, obtaining a cheaper cell phone plan, or getting a roommate to reduce your rent expense.

8. Set Up a Monthly Budget review

Its important for you to check on your budget and adjust as needed. You will also want to know how you did each month to see where you over spent and if you had extra left over. Life changes over time so changes will always need to be made to your budget in response. Once you have a good baseline for a budget, making tweaks is easier.