How Do I Make a Budget?

Budgeting. The dreaded B-word. Is it a ploy to suppress your financial rights as an American to spend recklessly or simply a way to control your money? I’ll let you decide.

When you hear the word "budgeting," what is your initial response? For many people (myself included not too long ago), hearing that cursed word results in an immediate feeling of pain and disgust. Some try to lessen the pain by disguising budgeting with cool names like “conscious spending plan” to make it sound less appalling (looking at you, Ramit Sethi).

It can be normal to view budgeting in a negative light, seeing it as restrictive and limiting. However, the purpose of a budget is simply to create a plan for how you’ll spend your money instead of spending impulsively and hoping for the best. A good budget does the opposite of limiting you; it helps you enjoy a nice dinner out or new Yankee Candle (looking at you, Wilson) without worrying if you can afford it.

The truth is that you can't control your finances until you understand your current spending habits. Tracking your expenses provides you a clear understanding of your current spending habits and the gap between your income and expenses. In the beginning, your findings may be painful, and that’s okay! Knowing where you stand financially will help you develop a plan to get where you want to be.

Just tell me how to budget, already.

The best budgeting strategy is called the zero-based budget. Here is a highly complex formula to help explain how zero-based budgeting works:

Income – Expenses = $0

And that's it! With a zero-based budget, the goal is for your expenses to match your income each month. This doesn't mean that you end up with $0 in the bank at the end of each month. It means that you should have $0 unaccounted for each month. You've assigned every dollar a mission and spent your money with intention, whether it be toward food, rent, your emergency fund, or other expenses.

Suppose your monthly income is $4,000. At the end of each month, all the money you spend, save, invest, or give should total exactly $4,000–not a dollar more or less.

The most important part of budgeting is to track every purchase you make to ensure you are actually following the plan you've made for your money. I know this sounds tedious, but I promise that it's simple, and the control you'll feel over your finances will be worth it. What good is a budget if you don't follow it?

Thanks to technology, you don’t need to break out the quill and scroll to make a budget. There are an endless number of budgeting apps and software out there to make the work easier. EveryDollar is my personal favorite, and You Need a Budget is another hugely popular one.

Let’s look at the budgeting process, step by step:

Step 1: Plan your monthly income.

Account for all income you’re going to receive that month, including income from a side hustle or any other sources. Don’t forget to deduct taxes if you’re receiving any income outside your job!

Step 2: Plan your essential (non-negotiable) expenses.

Set money aside for your essentials first, including groceries, rent or mortgage, utilities, health insurance, and transportation costs (i.e., gas, maintenance, and car insurance). Prioritize the things that keep you alive and help you earn a paycheck.

Step 3: Plan your necessary expenses.

These fall into one of two categories: fixed and variable expenses. Fixed expenses are expenses that generally don't change from month to month, including (but not limited to) car payments, internet, phones, and debt payments. Do not include unnecessary subscriptions here (I know, Netflix is life). Also plan for variable expenses that can differ from month to month but are still important (childcare, pet food, and supplies for work). Pro tip: Don’t forget to plan for seasonal expenses, like Christmas gifts.

*A car payment is a necessary expense but not essential because it can be eliminated or lowered.

Step 4: Set aside money for your investing, savings, and giving goals.

With all your most important expenses planned for, plan for the money you will put toward an emergency fund, debt payments, investing, or other big-ticket savings goals. The more money you can throw in this bucket, the faster you’ll reach financial independence. A good goal is to invest 10-15% of your income, depending on when you want to retire.

Step 5: Plan your discretionary expenses (AKA fun money).

The last step of creating your budget is to plan out your money to have fun with. This money can go toward anything from seeing a movie to dining out to a gym membership. Your financial situation will dictate how much fun money you should plan for. Don't spend so little on the things you genuinely enjoy just to give up budgeting after two months, and don't spend so much where you’re not saving anything for the future. Use common sense to find the right balance.

Step 6: Track all your purchases and adjust your budget as necessary.

Pick a consistent time to look at all your recent purchases and log them in the appropriate category within your budget. I recommend logging your expenses into your budgeting app at least once a week to regularly ensure your spending is in line with your plan and to make any necessary adjustments to your budget before your money is gone. You don't have to stick to your initial budget regardless of changing circumstances. Adjust your plan when necessary. Remaining flexible is key.

Here are some examples of expenses to plan for when creating your budget:

• Housing: rent or mortgage, homeowner’s association fees, property taxes, utilities (gas, electric, water, sewer, trash), lawn care fees, home repairs, renovations, internet, etc.

• Transportation: car payments, car insurance, gas, car maintenance, tolls, public transit, etc.

• Food: groceries, restaurants, vending machines, etc.

• Giving: tithing, charitable donations, gifts, etc.

• Savings: emergency fund, investing, upcoming big-ticket purchases, vacations, etc.

• Debt: credit cards, student loans, etc.

• Lifestyle: health insurance, medical expenses, clothing, pets, subscriptions/memberships, entertainment, childcare, children's extracurricular activities, self-care, etc.

Step 7: At the end of the month, make sure you've spent every dollar you've earned that month.

Put any remaining money at the end of the month toward whatever category you choose. If your income minus your expenses equal $0 at the end of the month, you've closed out your zero-based budget!

Just like that, you’ve got yourself a plan for your money that Dave Ramsey himself would be proud of. Budgeting can be painful at first. But over time, it’ll get easier and your net worth will thank you.

Call to Action

Pick a zero-based budgeting app that works best for you. Develop a budget for next month, making your best guess at your expenses. Track your expenses throughout the month to get an accurate picture of your spending, and refine your budget for the next month.

What We’re Reading/Listening To:

Podcast: The Journal - A Crypto Exchange Crackdown. Are you just fascinated by Wilson’s last letter on crypto?? Check out this short podcast on how the government (ew) is getting involved in any way it can.

Debrief on Deck

Next week, Wilson will talk about whether or not you should buy a house (spoiler: the answer isn’t always yes and your personal residence might not be as good of an investment as your grandparents say.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (Twitter and Instagram).

Until then, stay the course.

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