budget review

How To: 5 Tips to Create a Budget

We all know that we should have a budget, but actually creating and reviewing a budget is another story. Here’s how to take control of your money and create a financial plan. The first download in The Planning Life Shop is a Monthly Budget Template and Financial Plan.

Whether you use our template or DIY, here’s how to create your budget and make it happen. Let’s get started!

Step 1: Set up your systems: Get a snapshot of your current income and expenses.

There are a lot of ways of starting this step. You can go simple and just record it by adding up your expenses and income for the last month. The most efficient way I recommend is to sign up for a free mint.com account or YNAB (not free). If you still haven’t heard of Mint, you plug in your credit cards, bank accounts, loans etc. and then it all auto-refreshes on a daily/weekly/monthly basis – whenever you feel like logging in to look at it. Services like this are great, particularly Mint.com – because it’s free – we are trying to stay on a budget here! to use in combination with a spreadsheet. If you only have one account, then you could always just use your bank’s website, but mint is great for being able to set up everything once and then transactions coming in, auto-categorizing and tracking as needed. Think of Mint.com as the tool that keeps track of all the day to day info (it’s a bit more looking back) and your Budget Spreadsheet as the strategy and plan for your money (looking to the future).

Step 2: Set a baseline budget by categories of Income and spending.

The more data you have the more accurate your real monthly spending/income is. The basic idea of setting a budget is that you’re saying you make x and you spend x in all these different categories. You might think you are only spending $2,000/month, but tracking an ideal budget vs what’s actually happening can help you rein in things and optimize over time. Obviously you need to spend less than you make, but having a monthly budget to put in real #s over an entire year can show you what you’re actually spending on a monthly average. Bonus: if you start now in a year you’ll have a better idea of what you’re actually spending. For example: taking 1-2 trips per year, etc.

Step 3: Net “Worth”

This step is a little loaded with the worth word addition. Why you want to calculate this is to see where you stand in what you owe versus what you have with the goal to eventually have more than you owe – so that when you’re old and grey you have enough money, and that in the meantime you are ok financially in case of an emergency or life changes.

In my net worth calculation, I like to include all the extra details beyond just loan balances, but total payment amount, interest rate, payment going to principal and payment portion going to interest. Having this all in the same document can help you identify what to tackle first.

Step 4: Create a pay down plan

In this step, you’re taking a look at all your debts (loans, credit cards etc) and figuring out where any of your extra money needs to go to create the biggest impact.

Step 5. Spend less vs make more

There are a lot of people who abide by the theory that if you just make more money you don’t have to waste your time worrying about saving $20 on coffee a month etc. While I agree that getting a $5,000/year a raise is going to make a great visual impact on your annual budget, your culture of spending is very important in actually being able to keep that $5k. By getting in good habits when you have less money, you’re setting yourself up to make really smart decisions when you have more – it becomes a habit. So yes, go ask for that raise, but also optimize your current spending. Automate your finances. Pay off your credit cards every month. Make smart buying decisions. Splurge on things that are important to you. After reviewing your budget, if you see that you’re spending a few hundred dollars every month on new clothes or going out or drinks. Think about how that makes you feel and if it’s out of habit or something you truly enjoy. Adjust as needed.

Bonus: Try a low/no spend month as an experiment

I’m always for trying one month experiments and seeing what you learned versus declaring “this is the new me!” and then once you fail feeling like it’s over and may as well quit. So only try to go super low spend for 1 month. Get creative and use up more cans in your cupboard/fridge, try to cook more and make more budget-friendly meals, restaurant category out of control? Go out 1x/month, quit drinking for the month, or only drink at home. Don’t buy any new clothes. Use the library for books etc. After this month you’re going to have a pretty good idea of what the bare minimum you can actually live on is and what areas are more painful than others. If you want to get crazy about paying off your debt, try it for longer, but I’ve found it to be mostly helpful for identifying where your values are aligning or not with what you’re actually spending and the areas that are easier to cut down on. For example, spending money on clothes every month doesn’t align with my values as much. First of all, I don’t enjoy shopping as an experience, and I’m a bit of a minimalist so I try to make my clothes last me for a while. However, I spend a lot on food. When I was younger and really trying to buckle down on debt, I spent a bit less, but that’s always been a category that I let myself splurge on because I love, I love cooking and I love trying new restaurants, so that’s a category that I’m comfortable dedicating more of my budget to.

What’s the most difficult part of budgeting for you?

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