Raise your hand if you “budget.”
Now keep your hand up if all you really mean is, “I check my bank account once a month to see how much is in there.”
If your hand is up, first off, put it back down before you confuse the barista and the people sitting around you. Now just keep reading this sentence. Yes, they are staring. No, don’t make eye contact.
Good, now that we’re past that bit of awkwardness, I’m glad you’re here because this article is for you! And that’s doubly true if the thought of what’s lurking in your bank account makes you shudder.
Don’t check it now! There will be time for that after the article, I promise.
I want to get one big misconception out of the way upfront. Budgeting is NOT the same as checking your accounts and knowing what’s in there. It is NOT the same as setting up auto-pay on your credit card and bills, though that is a noble thing of you to do. It is not even the same as signing up for Mint so you can track your spending (though Mint and other apps do offer budgeting tools).
Budgeting IS like making a spreadsheet, and as you know, since life is like a spreadsheet, that means budgeting is life.
So how do I start, you ask. How do I make a budget?
Step one, make sure your parents and/or best friends are accountants! Just kidding, though that will certainly help.
As you may already know, Laura comes from a family of accountants – you can read about her favorite childhood maxim, “Life is like a spreadsheet” here. In addition to riveting dinnertime conversations, having a CPA parent comes with major benefits when you start wondering about how to make a budget.
My accounting guardian angel didn’t get his wings until we were in our early twenties. That’s when my best friend Lanny finished his MBA, passed the CPA exam, and became a torch carrying Dividend Diplomat (<<his wicked brilliant dividend investing blog).
He is also, frankly, part of the inspiration for starting Life is Like a Spreadsheet. Thanks, bud!
Lanny seemed to do everything right, while I squandered my early twenties accumulating unnecessary debt and putting off the serious work of planning for my future.
For starters, Lanny worked all through college – a very important strategy for students looking to avoid crippling debt into their 30’s. Amazingly, he never let his part time jobs affect his social life or academics.
Case in point, he finished his bachelor’s in accounting in three and a half years; an amazing feat he followed by earning his MBA in Finance 17 months later. Most impressively – he didn’t take out one penny of student loans, scraping together tuition every semester as he went.
In his first year out of school he passed all four parts of the CPA exam, got his professional start as an auditor a large firm, and somehow found time to buy a house.
I meanwhile, was busy heating up at the beer pong table and catching naps between classes. Alas, sweet zzzz’s were not the only thing I accrued during school. I also got my cut of the student debt pie.
After four years of undergrad, a semester abroad, and one year of law school (that’s a sad tale for another post), all told, the damage was a whopping $60,000! Ouch!
What’s funny is that my and Lanny’s financial lives began on the exact same day nearly 15 years ago. As 8th graders we were offered jobs after school answering phones and filing paperwork in the office. It only paid $4.90 an hour (not even minimum wage at the time), but helped start us each on the path to financial freedom.
I just tend to wander down side roads a bit more.
But I finally did return to that path in my mid-twenties. I had just landed a slightly higher paying job than my first, though still at a school – this time as an English teacher making $36,000/year.
And that was BIG money for me! It was that salary which opened the door for me to buy my first home – a decision that changed my financial life forever.
I know that for many of you reading this, even breaking the $40,000 mark can seem impossible. But whether it is $40K or $100K, it will often feel like a million bucks the first time you break that barrier… then it quickly begins to feel like a glass ceiling.
That is exactly what happened to me! At the end of my first year of full time teaching I was offered a pay increase for the next year…
Now, I may not have been a math teacher, but even I knew that wasn’t going to help me keep up with inflation. In my five years of teaching, I never broke the $40K mark.
Between my mortgage, student loans, and stagnant salary, I felt like I had started blindly making a peanut butter sandwich, only to realize part way through that I barely have enough PB to cover half a piece of bread. So I start spreading extra hard to try covering the whole piece, but I just end up tearing the bread, and now I’m eating torn-up, scarcely peanut buttered ball of dough.
Coincidentally, this was also my daily lunch and dinner routine during those years in the financial wilderness.
I needed help! Fortunately, there was Lanny.
In one evening, he took me from utterly ignorant of my financial situation to aware, alarmed, and angry that I hadn’t taken control sooner.
I sat at his kitchen table, paging through various spreadsheets, color coding, categorizing, and consciously deciding what my goals were and how to achieve them.
In this article, I am going to give you a link to the absolutely awesome budget spreadsheet that Lanny shared with me. This is a great budget template to help you start planning your financial future without having to redesign the wheel.
Enough backstory. Let’s get down to the brass tacks. So what is step one for making a budget?
STEP #1: Create a Spreadsheet
You knew I was going to say that, didn’t you? I alluded to Mint earlier, and I think they have some fantastic features to help with budgeting. While I have used this and other online tools for budgeting, I’m old school.
Budgeting with a spreadsheet is akin to balancing a checkbook by hand. It is becoming a lost art, sadly, and I think much of the reason that people have difficulties staying true to their budgets is because we’ve outsourced much of the planning, tracking, and thinking to automated programs and apps.
Have you ever checked your bank account part way through the month and wondered where your last check disappeared to? If we only rely on our credit card or bank statements, or even those nifty online budgeting tools, our finances can begin to feel like a black box.
We never really know what’s in there, always approximations, never exact understanding.
Using a good old-fashioned spreadsheet might take a few extra minutes at first, but if you develop some simple habits, you’ll see three things happen:
- You’ll actually look forward to revisiting your budget at the end of every day (seriously!)
- You’ll develop intimate knowledge of your daily spending habits and increase your accountability
- You’ll feel immense pride when you begin to see your efforts pay off!
I’m not only speaking for myself. I have personally shared my spreadsheet method with friends and family alike, and every single person has felt more empowered and seen results because of it.
STEP #2: Set a Savings Goal
This is an important one! Too many people start their budget by asking, “How much do I currently spend on X, Y, Z every month?”
There are several problems with this. First, you are beginning with a negative mentality. If budgeting is all about saving, investing, and creating a better financial future for yourself, then you need to start with the end goal in mind!
As a teacher, I always built my yearly curriculum in this way. I didn’t start by asking, “How am I going to cover all of this material?!” Rather, I started by asking, “What do my students need to know and be able to do by the end of this year?”
From that point I created my yearly goal, which broke down into quarterly goals, unit goals, and finally daily lesson goals. With a solid end goal in mind and a plan for getting there, I was then left to focus on executing my daily objectives one at a time, which felt much more manageable.
And if I ever got sidetracked, it was also easy to course correct because every step for the entire year had been broken down to the minute – literally! – within each of my daily lesson plans.
Budgeting is no different. Start with the end in mind and then BUDGET your resources to get you there.
Can I throw my teacher hat on for a second? Yes? Good.
Please take out a piece of paper and a calculator.
I want you to write the number you need to hit for your “goal.” Perhaps your goal is paying off student loans or getting rid of credit card debt. Maybe you have a big expense on the horizon – a wedding, vacation, an addition to the family.
What’s that you say? Go big or go home. Okay! Throw your retirement number out there. Whatever your end goal is, take ownership of it.
Now add 20% to that goal. Look, if we’re being honest, you’re going to encounter unexpected expenses, and I don’t want you to feel like you failed when you hit your goal only to realize it’s not enough.
But Mr. David, I don’t know how to do percents!
Eh hem, it’s percentages, and don’t be ashamed; I also doodled my way through Algebra 😉. Take your goal, multiply it by .2 – what number did you get? Now add that number to your original goal.
For me, I’m going to set a goal of saving $10,000. Quick math – 20% of 10 G’s is $2,000, so my new total goal is $12,000.
Step #3: Set a Time Goal
Now, set a timeline for yourself to achieve your savings goal. If you’re planning for an event then you might have a hard deadline. This is a good thing.
Having open ended timelines is a deadly trap for someone trying to budget. Simply saying, I want to buy a house sometime in the next couple of years is not conducive to good goal setting.
Be honest with yourself: What do you want, and when do you want it?
And PLEASE, don’t set a goal that you won’t be happy with. Now is not the time to be modest. Don’t aim too low because you’re afraid of failing. If you do, then when you achieve your goal you will feel let down.
Take a good look at your paper. It should now have two numbers: your dollar goal and the timeline for achieving that goal.
Pick that calculator up one more time. Divide that dollar amount by the number of months you’ve set to achieve your goal. My timeline for saving $12,000 is going to be 15 months. That’s $800 of savings per month.
That’s a big goal for me. How does your number look? Now that you know what you’ll need to stash away monthly, let’s explore how to save dat money!
STEP #4: Identify and Reduce Fixed Expenses
Now that you know how much you need to save, you can begin the budgeting process by laying out all your fixed monthly, quarterly, and yearly expenses.
Another misconception we need to dispel is that fixed expenses cannot be reduced or eliminated entirely. Too many people skip this part of their budgeting process because they assume they need to keep paying the same high rates for their utilities, phone, internet, car insurance, etc.
These are prime areas for maximizing your savings!
Generally, the two best things you can do are:
- Shop around for better rates
- Call to see if you can get your rates lowered by your current service provider
These rules apply whether we’re talking about cell phones, insurance, or home utilities. Every company faces competition, and you shouldn’t be afraid to ask for lower rates or switch providers entirely.
Quick real-life example: my parents had the same insurance carrier for 30+ years (I won’t say who, but their chicken parm tastes so good). They had both their home and auto with this company, and frankly, they were loyal to a fault.
Over those three decades, their rates consistently rose, and they NEVER shopped for a new provider. They did what everyone does: set and forget.
So long as they didn’t have any insurance claims, they never thought about it. Unfortunately, they were also not thinking about the savings they were missing out on.
When they finally agreed to shop around they were shocked to find a competitor that offered them a home and car bundle for HALF the cost of their current plan, and with identical (and in some cases better) coverage!
Since I’m sure many of you are wondering, I don’t mind sharing that they switched to Liberty Mutual, which is the same insurance company I use for home and auto. I have called other companies for quotes each of the past four years, and they haven’t been beat yet.
Once you’ve identified your fixed expenses and bargained the rates down as best you can, consider the ones you can drop entirely.
Ready to cut the $50/mo cable cord and go with Netflix? Or maybe you can even do without Netflix – gasp! Yes, it’s possible; during my ascetic phase I survived no TV or internet for five months and lived to tell about it.
It’s time for another honest look in the mirror. Would you rather hit your savings goal or binge watch New Girl? Would you rather unshackle yourself from the chains of student debt, or continue overpaying for car insurance because you didn’t take 20 minutes to call three other providers for quotes.
Taking control of your budget means first taking control of your life and that starts with cutting all the dead weight.
To put it another way, would you rather give the CEO of XYZ Utility Company your money, or keep it for yourself. You must be both your biggest advocate when it comes to saving your money, and your harshest critic when it comes to spending.
This transitions nicely into our next step.
STEP #5: Identify Auxiliary Expenses and Start Cutting Back
I break my auxiliary spending down into a handful of categories: Car, House, Groceries, Gas/Transportation, Entertainment, Restaurants, Travel, Miscellaneous, and Charity.
Don’t feel bound by these. I have even changed them over time as I became more cognizant of my spending habits. For instance, I used to lump restaurants into the entertainment category, until I realized most of my restaurant expenses came from lunches with coworkers, which was… err, fun, but not exactly entertainment.
Doing this helped me see where my paycheck was going, and as a result I began packing lunch more often.
This is probably the most fascinating area of any person’s budget, and the area in which we need to be the most honest with ourselves.
When I first started budgeting, I realized I had no idea how much I ate in groceries every month. During the first couple months when I was just tracking groceries and not truly budgeting, my spending was all over the place, varying by up to 50% from one month to another.
I also noticed I was throwing out a lot of once fresh food that had gone bad in my fridge. Raise your hand if you have 10-day old lettuce in your garbage right now.
Most people don’t realize that this kind of food waste is a symptom of improper budgeting. If you can plan for your month, and in turn the weeks and individual days within that month, you will shape your shopping and eating habits around the plan.
There are also many grocery store hacks you can employ to keep costs down, like buying generic instead of name brand, or whole veggies and fruits instead of the pre-cut and arranged varieties.
However you do it, you’ll need to make and adhere to spending plans that align with your savings goals. Which brings us to the next piece of rounding out your budget.
Step #6: Identify All Current Sources of Income and Seek Additional Cash Streams
I want to be careful with this topic.
Let’s first acknowledge that YES, your earning power can affect your saving potential. But beware of turning your income limitations into a crutch.
How often have you thought, If I only had a million dollars all my problems would be solved… Right!
What many people fail to realize through their daydreaming is that becoming financially independent is FULLY within your power! The reason most people do not realize this is, firstly, we are impatient, and secondly, we think the only ways to become wealthy are through fame or luck.
Do not fall into the trap of conflating these things – while fortune may attach itself to fame or luck in some instances, wealth is built slowly and methodically over time with equal parts discipline, smart tax strategies, and the beauty of math and compound interest!
Stop thinking about how to become famous, and start thinking about how to become the millionaire next door. You know, the one who still drives a Honda Civic because it’s economical and turns out the lights when he walks into another room.
The point is this. Most us, 99% to be exact, fall outside of the celebrated 1 percenters. You may think that your income is too low to save, but odds are it is either within the middle 50th percentile or above.
That means that your odds of becoming financially independent are very nearly the same as everybody else’s. If done sincerely, steps #1-4 will do the lion’s share of getting you to your financial goals.
Now, let’s consider the importance of maximizing your earnings as this is the major driver for your budget.
If you work an hourly job, can you pick up extra shifts? If you are salaried, can you get your work done more efficiently thus raising your effective pay rate and freeing you for other pursuits? In either case, have you asked for a raise? How often? Did it work? No? Ask again. Yes? Great, still ask again.
But Mr. David, my boss is mean; we only get pay raises once a year per company policy; a raise only comes within a title promotion; insert other excuse here.
I don’t mean to be harsh, but too often people tell themselves something is not possible before even TRYING! This is amazing to me – even if you are 99% assured of failure, isn’t 1% worth a go?
And if you are in a dead-end job, have the courage to explore your options. One of the best ways to get a raise or a promotion is to come with an offer from another company. This strategy has both failed once and succeeded once for me in my career.
Funny enough, in the case where my employer did not match my offer I stayed, and in the case where they matched, I still left. Trust me, I knew what I was doing, I think *(nervous laughter).
Regardless of your current situation, be willing to try and put yourself out there. Failure IS an option, and you should embrace it. If you won’t allow yourself to fail, it means that you are not stretching yourself enough.
In addition to the pay increases you might seek through your current employer, be vigilant about finding additional ways to make money. Here are a few that I can speak to, but this list is by no means exhaustive. There are literally countless ways to earn money on the side; find what works for you!
Step #7: Find Passive Income Streams
I want to contradict myself – I’m allowed to do that right? In the previous step I suggested you might be able to work more or longer hours, maybe even find another job or side hustle to supplement your current income.
Now I’m going to recommend that you not.
Well, not exactly. I have been in that position before, working a primary job that paid way too little and took up far too many hours. It left me feeling exhausted, yet desperate for other sources of income. A second job on weekends or evenings seemed like the only answer, but I felt too tired to pursue it.
It took a while for me to come around to the idea of letting my money work for me.
Finding passive income streams can help you make money without needing to create extra hours out of thin air.
The best method for me, as you might have guessed, is through my blog. If you’re considering starting your own, check out my how-to guide before you do anything! Learn from my ignorance and don’t make the same rookie mistakes I did.
Step #8: Crunch the Numbers, Create a Routine, Define Rules for Adjusting
Now that you have your expenses and income in front of you, does the math show you hitting your savings goal?
If yes, and you have room to spare, you’re golden.
If yes, but it’s tight, remember the 20% rule and see if you can find other areas to save and/or earn extra.
If no, then it’s time to reevaluate. Start with your discretionary spending and work backwards.
Perhaps the most crucial step is creating a new routine. I recommend entering every receipt into your spreadsheet before the end of the day – if you don’t, you’ll get behind very quickly.
The other necessary step is to decide how you’ll go about making changes if you see that your budget predictions were way off in either direction. If you simply raise the amounts that you allotted for yourself to spend in each category, your margin for saving will rapidly shrink.
The question will always return to what is most important.
If hitting your savings goal is the most important objective in your financial life, then keep that front of mind. Be honest with yourself as you craft your budget goals, then promise yourself that you will stay faithful to the plan!
And since I know you’ve read patiently through this entire article, I have a little gift for you.
Click here to see the explanation of the actual budget spreadsheet that I use! There is also a link to the spreadsheet that you are welcome to download or make a copy of for your own use.
Cheers, and happy budgeting!