When you don't know how much money is coming in and going out of your house, it's impossible to know where you are and if you're overspending.
Honestly, you probably ARE overspending, if you're like most people that don't track their their money. Overspending doesn't necessarily mean that you're in the red each month. It just might be that you're spending WAY too much in one area of your life, making it hard or impossible to make progress in another.
A Simple Budget is Your Answer!
If you've never made a budget before, it can be intimidating. Where do you start? How much goes in each area? What formula do you use? Here's a primer on the types of budgets, the one I recommend, and your basic steps for setting one up.
There are two common kinds of budgets.
The two common budget types are a percentage-based budget and a simple dollar-based budget.
Some people swear by a percentage-based budget. This is where you lump all your expenses into a set percentage. The most common "simple percentage budget" is a 50/30/20 budget. (You may have heard of it as the 50-30-20 rule.) In this budgeting method, you group your expenses into 50% for your "Needs" (housing, food, utilities, etc.), 30% for your Wants (Entertainment, etc.), and 20% for Debt Repayment & Savings. For people who are looking for some general guidelines and don't need to really track their dollars closely, it might be just fine.
But that 50/30/20 rule doesn't work for everyone. Some may live in an area with a high cost of housing and feel like the proportions are just totally out of whack. Others (like me) need more guardrails and feel like it's a little too unrestricted.
To learn more about the 50/30/20 Budgeting Rule, click through to my other post explaining the 50/30/20 budget in more detail.
When I started budgeting, I felt like our money was out of control.
For that reason, the 50/30/20 budget wasn't appealing to me. I needed someone to tell me how to really track every single dollar that came and went through our bank accounts. I needed someone to help me lock it down. We can debate about how much of that was due to the fact that I have some control freak tendencies and how much of it was because I just felt a little overwhelmed at the start, but the real need was the same - show me what to do, and I'll do it.
Several years ago, I started with this basic budget. I was surprised to see how easy it was once I got started!
Was our budget perfect the first month? OMG, No. Was it perfect the second month? Nope. But it was getting better. After the third month doing a budget, I felt in a much better place, and so did my husband. Perfect is the enemy of good, so aim for good. (You'll get there, I promise!)
Here we go. Go grab a piece of lined paper (yellow pad works) or fire up your favorite spreadsheet program on your computer.
Step 1: Add up your monthly income.
Add up all your paychecks and regular income. If your income varies, you might want to figure on your low end average. We're just trying to figure out what you need to live on here.
Step 2: List your expenses by category.
Go grab a bank statement so you can see what your payments were in the previous 30 days. This will make things accurate and much easier to write out.
Your first category is housing. List all your housing-related payments. This would be your mortgage or rent. Do you have a first and a second mortgage? Put them both down. Our property taxes and homeowner's insurance payments go through an escrow account on our monthly house payment, so for me this is all one line. Do you have regular HOA dues? List them here.
Next is utilities. You need to have the lights on and the water running. List your electricity, water, gas, phone (and/or cell phone), trash, internet, etc. It's up to you if you want to insert "Food" here. If you do, this will be your grocery budget, not your "eating out" budget.
Now list your transportation. List your car payment(s), if you have any. Each vehicle should be on its own line. Tally what you spent on gas last month and put that on another line. Do you pay tolls or parking? What's your monthly car insurance payment? If you don't pay it monthly, divide your premium by however many months are covered with each payment and put the monthly amount down.
The next category is lifestyle. For us, that's stuff like the gym, the kids' dance and swim lesson fees, entertainment, eating out, etc. This category will vary from person to person. Don't eliminate entertainment. You have to do something fun, even if you're paying off lots of debt. It doesn't have to be expensive fun, but plan for it nonetheless.
I also place "gifts" in this category. So each month I do a budget, I think about upcoming holidays, birthdays and graduations that will require us to get gifts. This can be unpredictable to a point, since your kids will inevitably get invited to birthday parties of friends at school. You might want to build in an extra $20 or so, as padding for those surprises.
Do you have pets? If so, they have to eat, too. Even if you're not buying food, cat litter or medications monthly, you should factor in their needs. Break it down to a monthly average so you've got enough banked for when you'll need it.
Don't forget your debts! Tally up each payment you've not already listed out. That means every credit card or line of credit payment, student loans, anything you owe to family, etc.
Step 3: Add your amounts up by expense category.
Tally all of those categories individually. This is an important step, because you'll be able to see about how much you spend on each category. In the likely case that you decide you want to cut back somewhere, you can start with certain categories.
Step 4: Add up all your spending category totals and subtract them from your income.
Here's where the rubber meets the road. You should have money left over! If you come out in the red, then you need to go back and look at each category to see where you can shave something off. You could also look at ways to make extra money, such as picking up a side job in this "gig economy" of ours. Many people deliver packages for Amazon Flex or drive for one of the ride share companies.
You can also earn gift cards by taking surveys online. While not cash money, you could cash in your survey points on movie gift cards (taking a bite out of the entertainment bucket), or other gift cards that can be turned into grocery funds or gifts to others.
There you have it, your very first budget. It wasn't that painful, was it?