How to Build Your First Budget

Many people think of “budget” as being restrictive; a list of what you can’t afford to do with your money. In fact, creating an effective budget means taking control over how much money goes into each category of expenses so that when the month ends, you know exactly where your money went instead of just wondering. Your first budget doesn’t have to be perfect, but it has to exist. Below are ways you can create a functional budget on paper within a few hours, and maintain it by devoting about ten minutes per week toward it.

Start with what’s coming in

Begin Text Write down how much money comes into your bank each month in the form of a check or direct deposit (your “take home” pay). This is different than what your employer shows as your gross salary. The number should be an actual amount that was deposited in your checking account last month, not just the number on a piece of paper. For those who have fluctuating income from week to week, or for those whose months vary from month to month, use the lowest take home pay figure you’ve had over the last six months since everything else in your budget will depend upon this one number. Get this correct first; then move on to other areas.

Sort your spending into three buckets

Sort your spending for last month from bank and credit card statements into three categories: needs, wants, goals. Needs are those bills which will hurt you if they don’t get paid on time (rent, grocery money, utility payments, insurance premiums and minimum debt repayment). Wants are the things that would be nice to have but don’t really need such as a night out at dinner, subscription services or hobbies. Goals include savings and any extra amounts you pay toward your debts beyond the minimum required amount.

A popular starting point is the 50/30/20 rule, which sends about half of your take-home pay to needs, 30% to wants, and 20% to goals. Treat it as a guide, not a law. If your rent alone eats 45% of your pay, your split will look different, and that’s fine. The point of the exercise is seeing where the money already goes, because almost everyone finds at least one number that makes them say, that can’t be right.

Give every dollar a job

Now assign your income out loud. So much for rent, so much for groceries, so much for the credit card, so much into savings. The aim is for your income minus your assignments to come out to zero, which planners call a zero-based budget.

This is the portion that affects your actions. Once a dollar has a function (you’re using it for some particular purpose), then spending money on other things will be based upon decisions rather than happenstance. When a friend asks you to go away for a weekend, then as long as there’s money in the travel category, you’ll have no need to wonder if you can afford it; your money and time will have been accounted for.

Budget for the bills that aren’t monthly

Irregularly occurring expense items cause most of the problems with your budget. Car registration, holiday presents, vet visits, and those twice-a-year premiums for insurance are examples of irregularly-occurring costs. Identify all of your non-monthly expenses which you know will be coming at some time. Divide the cost by how many months there will be before this expense comes due to create a separate fund (the “sinking fund”) for that particular item each month. Once this expense comes due, you have already paid for it out-of-pocket using money from your sinking fund so December won’t become an emergency when it arrives.

Automate the parts that need discipline

Willpower is no good for managing money, so be smart and use as little willpower as you can to make saving happen. Set up an auto-transfer from checking into your savings account one day after pay-day with any amount (it could be $20), this way when payday comes around and the funds hit your account; the cash goes directly to savings immediately afterward, eliminating the decision that was once associated with how much you have available to save. Likewise set all of your fixed bills on Auto-Pay so that due dates are never something you need to think about again. The remaining balance in checking after these automatic transfers go through is what you get to spend without having to do math while standing in a grocery store checkout line.

Check in for ten minutes a week

You don’t make a budget to create something new. A budget is viewed as a tool or something you check on occasion (a minimum of every 10 minutes). Find your standard time that fits into your schedule, and take three actions: look at the remaining funds in all of the categories, reallocate funds from one category to another if your life has changed, and find any items that may be unexpected. This will be the entire meeting. Budgets aren’t created with perfection; budgets fail because of abandonment-not imperfection, and this quick review helps keep your budget active for years to come.

When the numbers don’t balance

You may be facing some tough decisions, but if your expenses have eaten up most or all of your income to the point that you don’t know how you’ll meet those basic needs; then this budget hasn’t failed you. Instead, it’s given you a very clear picture of what your financial situation is. Most people don’t get such an accurate view into their spending until they’re forced to confront reality by being in crisis financially. At least now you can begin working with your fixed costs and consider alternative sources of supplemental income, and cut back on discretionary spending temporarily.

That’s the whole first budget. One number, three buckets, every dollar assigned, the boring parts automated. Start it tonight and let it be rough. A rough plan you actually follow beats a beautiful one you never open again.

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