If you’re struggling to manage your finances and find yourself wondering where all your money went at the end of every month, it’s time to create a budget.
And I know, I know, you don’t want to make a budget.
But here’s the deal. A budget is a powerful tool that can help you take control of your finances and achieve your financial goals. In this video, we’re going to create a budget with just a few simple steps.
Before we dive into the steps, I think we need to address the elephant in the room.
There’s this rumor going around that a budget tells you stop spending money. Scuse me, you make the budget! So if your budget is too strict, then you’re the one telling yourself to stop spending money.
If you decide that you want to spend $400/month on eating out and that’s financially possible for you, then do it.
The goal of a budget is not to suck every joy out of life. Rather, it’s an opportunity to intentionally decide how you’d like to spend your money.
Step 1: Determine Your Income
The first step in creating a budget is to determine your income. How much money is coming in?
This includes any money you receive on a regular basis, such as your salary from your job or any side hustles you might have. Make sure to include all sources of income, so you have an accurate picture of your financial situation.
We are just interested in post-tax income, since that’s the money you have to spend. If you have a business or side hustle where taxes aren’t automatically taken out for you, open up a savings account that’s only used for this purpose, and put money in there for taxes before you spend a dime on anything else.
Because we do not want to get in trouble for not paying taxes.
Step 2: Track Your Expenses
This includes everything you spend money on, from rent and groceries to entertainment and travel.
To do this, you can use a budgeting app, simply write down all your expenses in a notebook, or download the free budgeting template down below (hint hint).
When you first start to track your expenses, you might feel a little bit of shame.
“Why on Earth did I buy that?” “I spent how much on that?” “Oh my gosh, I haven’t used that subscription in months, I’m still paying for it?” [look off to the right, then left, then right so it looks like different times/people saying that]
But listen! Financial education is rarely taught in school or even at home, and yet, we think that we’re just supposed to know everything about money.
But the problem is, since we didn’t formally learn how to manage money, we’re left to subconsciously absorb any money habits we observe growing up.
As you go through this process, give yourself a boat load of grace and cheer yourself on like parents do when their babies are learning to walk. We wouldn’t get mad at a child if they didn’t know how to walk the first day…don’t get mad at yourself.
Step 3: Categorize Your Expenses
Once you’ve tracked your expenses, it’s time to categorize them. This will help you see where you’re spending the most money and where you can cut back. Common categories include housing, transportation, food, entertainment, and debt payments.
It’s important to note here that categories can be whatever the heck you want and they can be as broad or as detailed as you want.
If you decide to go broad, let’s say you create a category for things that are not necessary. After a few months, if you feel like you’re spending way too much in that area, you can always come back and break that category into smaller sub-categories to see what’s really going on.
Step 4: Set Your Budget
Now that you know your income and expenses, it’s time to set your budget.
Start by allocating your income to each category based on your spending habits. Make sure to prioritize your essential expenses, such as housing and transportation, before allocating money to discretionary expenses like entertainment.
If your expenses exceed your income, no big deal, just make some adjustments and until the numbers work.
And keep in mind, your budget does not have to be perfect and odds are, it’s not going to be perfect. The goal is not to have the perfect budget befopre you move forward….if you do that, you’ll still be working on the “perfect” budget 60 years from now.
The goal is to get a starting point and get moving. You will learn more from testing and tweaking than you will from strategizing till you’re blue in the face.
Step 5: Review Your Budget Throughout The Month
Creating a budget is only the first step. But creating a budget then never looking at it again is as helpful as going to the gym once.
The key to financial success is sticking to your budget. And the key to sticking to your budget is reviewing your budget frequently.
Reviewing helps you remember what your goals are for that month and can help you adjust as needed.
Let’s say you set your budget but then 10 days later you have a small, unexpected expense. Reviewing your budget might allow you to move things around so you don’t need to use debt to make it through the month.
Not only does tracking your expenses regularly help you adjust your budget as needed, it also helps you avoid impulse purchases.
And noooo, you don’t have to spend an hour per day meticulously categorizing everything. Even a few minutes logging into your bank account or credit card every few days can make a huge difference.
Step 6: Make Saving a Priority
Now that you have a working budget, and remember, it doesn’t need to be perfect. Not only is it perfectly acceptable to tweak it as you go, it’s totally a part of the process. It’s a journey…
Once you start to feel comfortable with your budget, then you can start to focus some of your energy towards building up your savings.
This could be for an emergency fund, retirement, or a specific financial goal like a down payment on a house or a vacation.
It’s okay to start small in this area. Pick a monthly amount that feels attainable and have the goal to increase it every month or every couple of months. You’re more likely to stick with a saving goal if it seems easy…than if you set a pie in the sky savings goal that requires you to sacrifice everything to attain.
Time and time again, reguardless of the type of goal, I see people set very strict goals that they might stick with for a week or even a couple of months. But as soon as there comes a time where they’re not able to make their goal, they feel like a failure and quit.
I don’t want that for you, so I want you to give yourself lots of grace as you learn this new skill. After all, saving even a tiny bit is better than not saving at all, or worse, going further into debt.
Any amount you save is a gift to your future self.
Step 7: Review and Adjust Your Budget Regularly
Your budget isn’t set in stone. It’s important to review and adjust your budget regularly to make sure it’s working for you.
Every month is a brand new opportunity to sit down and look at the previous month. What worked? What didn’t? What areas were you able to stick to the budget? What areas do you still need to work on?
Remember, you can restrict your spending using willpower…or you can adjust your budget to accomodate that spending.
Let’s say you only put $20 into the budget for buying coffee while you’re out. If at the end of the month, you realize you spent $30 in that area, you have a couple of options for the next month.
You can keep your budget at $20 and either be better about planning your coffee excursions or be better at telling yourself no in the moment.
Or, you can raise your budget in the coffee area by lowering the budget in another area.
You are the boss of your budget and therefore YOU get to make the decisions (along with a partner if you are in a relationship). I’m not going to tell you to stop spending money in a certain area, because what I value could be drastically different from what you and your family value.
Remember, the goal of a budget is not to drain every ounce of joy from life. The goal is to intentionally decide where to spend your money…so that you’re spending it in places that are most important to you.
That’s why it’s so important to review and adjust your budget regularly (problably monthly) as you learn this new skill.
Step 8: Get Creative with Your Budget
This is the fun part!
I want you to imagine yourself six months or a year from now. You’ve had plenty of practice monitoring your spending, tweaking your budget, and building up awesome money management habits.
This is the point where you can start to get competitive. Let’s say you have a goal to save up for a vacation to the Bahamas in the middle of winter. You’re so excited to lay on the beach, listen to the light crashing of the waves…all while your coworkers are back home, shoveling snow off their cars.
Are you on track to meet your goal? If so, could you do it quicker?
Could you…find a side hustle, rent out a room in your home or learn to cook meals on a budget?
When we were paying down our mortgage, we had a regular monthly amount that was our goal? But the more we paid down the debt, and the more we saw that progress, the more motivated we got.
We sold things on Facebook Marketplace and eBay — not always successfully, but it’s a learning process. We stopped buying clothes. We shrank our food budget as much as humanly possible.
We were FOCUSED.
You don’t have to do any of those things if they seem like too much of a sacrifice to you. But the more you are willing to get competitive and get creative, the quicker you will see yourself accomplishing your goals.
Creating a budget is so amazing. I cannot harp on that enough. It is simple and powerful and it helps you take control of your finances, which honestly, makes you a VIP.
Remember to have a lot of grace with yourself as you go through this process. Just like a baby learning to walk, you are taking the steps to get control of your finances and for that, you deserve FIREWORKS!