setting the budget

Mastering Financial Success: The Budget

/ 10 Steps To Invest For Beginners, Budgeting / By

Imagine a life where the rules didn’t apply.  No stop signs.  No authority to govern your life.  Some might imagine this as wonderful, a world without rules, but most of us would consider the consequences and realize these laws are there to keep things in control.  Orderly.  Productive.  Efficient.  And safe.  It’s the same with our budgets.  Mastering financial success by starting with and perfecting our budgets will help keep our financial lives in control and help bring us greater wealth.

Ah, yes, the budget.  I know, I know, nasty word, right?  I get it.  It’s not something we like to really talk about.  It has such a negative connotation because it’s something that forces us to adapt to financial restrictions we would prefer to ignore.  It says “no” when we want to say “yes”.

But just as a life without rules could be disastrous, so too our finances would suffer without this wonderful thing called a budget.  And if you think about it, it’s truly step two in our financial journey.  We first need to evaluate our beliefs about money.  Then we need to look at our budget.  Without navigating and conquering this hurdle first, our success will be sabotaged.  Every step forward you make will be interrupted and stalled (or even be set back) with a malfunctioning budget.

Change Our Perceptions

But let’s change the characterization a bit shall we?  Instead of viewing a budget as something restrictive and negative in our lives, let’s rather consider it as something that saves us.  A life raft if you will.

Trust me, in the middle of an ocean with a sinking ship, the life raft will be your number one choice.  Nothing else will matter at that point.  It’s essential for your survival.  So, if we start looking at our budget as something indispensable, something incredibly important in your life, something that will keep you afloat, well, maybe we might take more notice of it and place it where it deserves to be in our life:  as a priority.  Remember, it’s a tool for our survival.

This is how you start mastering financial success with your budget.  Because it can be much more useful than just survival.  It can cause us to thrive as well.  Because with it we can not only take care of those monthly bills and essential things we need in order to have the basics in life, but it can also be a tool used to better our life.  With it, we can create opportunity we might otherwise not be able to take advantage of.

So, here we have two positives for the budget so far:

  • A life raft for survival
  • A tool used to create financial opportunities

So, How Do We Create A Budget?

Well, first, let’s identify that there are many variations of a “budget” out there and many ways to track it.  So, you have options to choose the best one that works for you.  Well explore more, later.  But let’s start with very simple basics for now and you can expand to the complex in a bit.

Step One:

  • Figure out your monthly income (after-tax): get a firm dollar amount.  For most this will be consistent, regular income you receive as a paycheck from your normal job.   For others of us, it may be sporadic and a bit harder to figure out.
    • Consistent Income: This is probably the easiest to do, especially if you get a paycheck on a regular basis.  Just figure out this number (add in all the income you receive from your job after tax – what you actually bring home.  Include income from your significant other as well – don’t forget about alimony and child support and investment income if you have any).budget
    • Irregular Income: this can be a bit trickier since the income isn’t the same every month.  For our purpose, write down the minimum income you bring in.  Example:  Jan brings home $3,500 monthly from regular paychecks, but John brings home $2,500 to $5,000 from various jobs.  We’ll take John’s lowest amount ($2,500) and add it with Jan’s income = $6,000 monthly consistently.
      • You may have “extra” income coming in from part-time jobs, side-hustles, etc. We’ll look at this below, but for now count on the minimum amount you consistently get each month (something you can count on).
      • This is now your “salary” for the month: either the consistent income and/or the lowest “irregular” income.
      • Extra income: do you have “left-over” income say from a bonus or commission?  How about a side-hustle?  (Money made by John in excess of $2,500 for the month?).  No matter where it came from, save it for a rainy day, but don’t count it in your consistent monthly income.
        • Put this money into a separate savings account that is “linked” to your checking. This can act as your reserve fund for months where you’re short.

Step Two:

  • Figure out your monthly expenses: again, get a firm dollar amount.
  • Go ahead and list it all out: go old-school at first.  Get a piece of paper and make a list.  Mortgage or rent.  Cell phone.  Fuel.  Groceries.  You name it.
    • The secret to this is looking through your banking statements (or online account) and seeing what bills you have. It is very easy to “forget” about bills so this part is essential.
      • Start with the regular consistent bills (mortgage, insurance, groceries, etc.)
      • Move on to the irregular bills: you know, the birthday gifts, haircuts, auto maintenance, and the surprise trips out of town (this list can be quite lengthy, I know mine is!).  This may be tough to figure out initially – you may have to start out with a rough figure here and fine tune as you go (ie:  figure out what you’ve spent over the last year then divide by 12 for a monthly average expense)
        • Create an “extras” bill label that covers these irregular expenses – consider this a regular monthly bill you have to pay.
        • This may take some work initially because you may need to look over many months of “extra irregular” expenses to figure out what the monthly cost as an average these will be. Just be aware of these costs – it’s important to figure them out – otherwise they will sneak up on you and affect your budget.
        • Figure out the maximum amount you usually spend per month and use that as the amount you will “pay”.
        • To help, you can set up an “automatic” deposit into either a separate savings or similar account that is for these infrequent expenses.  This will keep your “bill” regular and easier to take care of (since you’re “paying” these monthly to this specific account).  As these infrequent, irregular bills actually come up, dip into this fund to pay them.

Step Three:

  • Follow one simple rule: you cannot spend more than you earn (and, no, credit cards do not count as part of your “income” – although we like to think of them in this fashion!).
  • Step 1 minus step 2 should equal out or be positive (preferably you would like money left over which can be used for an emergency fund).
  • This means you’re staying in budget!

Types of Budgets

So, the above is an example of a very basic budget.  But what if you want to be more of a master with budgeting your finances?  Are there more “advanced” techniques?  How much should you be allocating to different categories?  How much should you be saving?  Well, below are a couple popular budgets that I like that can help you answer those questions for your situation.  One of my favorites is called the zero based budget.

Zero Based Budget

This budget is one of my favorites.  This is where you assign all of your income to a specific purpose or intent.  At first this may sound a bit confusing but it isn’t.  The bottom line here is this:  every dollar you make minus every dollar you spend or save = zero.  You’ve accounted for every dollar and they’re working for you vs being lost in the ether somewhere (have you ever had cash on you but a day or two later you had no idea what you spent it on?  Yep, me too).  The other benefit of the zero based budget is that is can help you save more as well as spend less.

Let’s take a look at it.

In its simplest form, it’s taking all your income minus your total expenses (including savings) and having nothing left over.  You finish with zero left over in your budget.  All dollars accounted for.  Although a zero balance sounds more like a negative thing, this is actually something you’ll benefit from.

Example:  Total income (stable paychecks + any extra) – (minus) all expenses (things like predictable bills + savings/investments + any other outflow of money) = Zero

If you earn $4,000 in the month coming in, you should account for $4,000 going out.

  • $4,000 income coming in
  • – $1230 rent or mortgage
  • – $500 food (money used to cook at home)
  • – $250 electric
  • – $200 credit card bills (too much! Get rid of this ASAP!)
  • – $400 entertainment (cable, going out, etc – here is a great area to cut back if needed)
  • – $120 phones
  • – $500 savings/retirement (Yes! Make a priority!)
  • – $400 eating out/coffee/extras (warning, this can eat up the budget quick!)
  • – $100 water/garbage/etc
  • – $300 car payment
  • – all of this balances to = ZERO

In this budget you can make a plan for your money including saving and investing.  This helps leave no dollar wasted.  The more you watch your dollars (and make them accountable to you), the wealthier you can be in the future.  As you eliminate needless bills or expenses, you can reassign those dollars towards savings instead.

Dave Ramsey has made this budget technique very popular.  And there’s a good reason:  it works!

50/30/20 Budget

This is another popular budget.  Here you allocate 50% of your funds to necessities, 30% to wants, and 20% to savings and any kind of debt repayment.  As you would imagine this leaves you a bit of wiggle room (especially if you don’t utilize all the funds in each specific sector – or if you use too much!), but overall it keeps you on track and gives you a framework to work by.

  • 50% for Needs
    • Think groceries, insurance, automobile expenses, child care, electricity, water, garbage, cell phone, etc
      • Hint: if you overspend in this department, you’re going to have to steal from the “wants” section below!
  • 30% for Wants
    • Now this is an area that can leave a little bit to the imagination! Why do you ask?  Well, what’s the difference between a “need” and a “want”?  Some would argue that their daily coffee at the street corner is a need.  My wife would say that buying organic is a need vs a want.  So as you can see, there is a little bit of interpretation here.  The idea here is to actually “budget”.  Remember we still have to do more than just survive in life.  We have to have a little fun as well, right?  So having an area for wants can be a good thing.
  • 20% for Savings/Debts
    • What’s one of the first things investment advisors recommend? Let me just tell you:  it’s starting a small emergency fund.  So get that done.  Here is the part of the budget that will allow you to do it.  What’s that magic number you ask?  Well, that depends.  Do you make $40,000 per year or $140,000?  The overall advice is to eventually save up to 6-8 months of expenses, but the important thing is to just start even if it’s only $200 to get you going.  Just start tackling it with small steps.
    • Pay off that short-term debt! This is one of the killers of your financial future and will prevent you from truly succeeding at financial success.  This kind of debt usually carries a high interest fee.  The result:  lots of money going out of your pocket into someone else’s.
    • Invest, invest, invest. Use this area to start investing in yourself.  Start and build that company 401k plan.  Start a Roth IRA.  There are lots options here so explore and learn.  Once you get that emergency fund set up, your debt taken care of, then this 20% can help build your wealth immeasurably.

Here is a nifty budget planner I found on Nerdwallet for your convenience.

Great Tips To Master The Budget

Pay Yourself First

moneyThis technique requires you to set aside funds (such as for saving and investing) after your essential bills for survival and before your other immediate expenses.  I would put it right up there with the “essential” bills you have to pay.  Just like you enjoy a roof over your head and electricity to keep warm in the winter, allocate a certain amount for your future.  It’s a “must” and you should contribute to it if at all possible.

You set aside money for your future before you spend it on the stuff you want today.  For myself, I just consider it an actual bill, something I have to do.  Simply set up a separate savings account and have money automatically deducted from your paycheck (immediately the day you receive it!) so it lands in this account to be used for a special purpose (at first to build an emergency savings account and then later to invest).

Adapt A Budget That Works For You Personally

If you look online there are many budgeting techniques out there.  We looked at only a couple, but adapt one for you.  Whether you like to use online tools or go a bit old-fashioned with pen and paper, just adopt something that keeps track of what comes in and what goes out.  Just remember, spend less than you make and you’ll be doing better than most people out there!

Automate Everything

Since we live in an electronic universe, it’s easier to automate our finances than ever before.  Automate paying your bills on time.  Automate saving a certain dollar amount to a linked savings account.  This will end up being less effort on your part which means it actually gets done!  And it’s now consistent which is important.

Budgeting Software

There is a lot that is now offered in our electronic world today.  Mint and YNAB (You Need a Budget) are very popular ones.  Others are EveryDollar and Personal Capital.

Mint

Mint is one of the older and more popular apps.  It will categorize your transactions (from linked credit/debit cards, checking/savings accounts) and can track them against your budget.  You can see where you’re overspending in any category.  Alerts will signal when you go over budget as well.  You can also set goals for yourself.  Mint will also give you personalized recommendations for your budget, debt consolidation, and growing your investments.

YNAB

YNAB acts a lot like the zero based budget mentioned above where you assign every dollar a job.  You set a budgeting goal and this app will help you stick to it.  It’s popular because it can help you save money early on.  Although it charges a small fee, the rewards can greatly be worth it.  There are those who swear by this app believing that it encourages a lifestyle shift, which, of course, is what we’re going for here, correct?

EveryDollar

There are certainly other budgeting apps out there so explore for yourself.  EveryDollar is another popular one by Dave Ramsey.  Budgeting is done very easily here but it also offers his “baby steps” made popular by his books  to save for emergencies, pay off your debts, save for the future and building your wealth.  EveryDollar has a free and paid version.

Personal Capital

Personal Capital is another popular tool that can help track your spending and saving but also is geared toward your investments as well.  Although it does offer budgeting aspects, it’s more geared toward wealth management.

Open Up Various Accounts

What do I mean by that?  One of the easiest ways to save for an emergency fund or an “extras” or miscellaneous fund mentioned above is to open up a separate savings account and allocate funds to those accounts on a regular basis.  If it gets confusing having everything under just one main account, this may work for you.

In the example above, we had an “extras” bill for those miscellaneous expenses.  An extra savings account works great for this because we can deposit a monthly set amount into it and pull from it as needed on an individual basis.

You can have many of these accounts such as an emergency savings account, a vacation account, a car maintenance accounts.  There are no rules that says you only get one savings account.  I know this may sound a bit extreme, but if you’re having trouble keeping funds separate and accounted for this may do the trick.  I used to have a separate account for even a “Christmas club” fund believe it or not.  Even $50 a month gave me what felt like a bonus check come the holiday season.

Tip:  Another little tip is to open up accounts not linked to each other if you have trouble inappropriately spending from them.  For instance if you’re having trouble because you’re dipping into your emergency fund on a regular basis (for non-emergencies) then open up an account at a different bank entirely.  This will help you to only use it for true emergencies.  The harder it is to access them, the easier it will be to not touch them unless you need to.

The Bottom Line:  The Budget Is Your Life Raft

liferaftSo hopefully you can see the importance of the budget.  It’s truly essential for your financial survival.  If we change how we view the budget, about how we use it in our lives, we’ll be more prone to using it.  Now we can see that it deserves a place of priority.  This is how you master financial success:  it starts with your budget.

Just like the life raft, this can save you.  One a cruise ship you probably don’t really notice the life rafts strapped to its sides.  Even though they’re easily visible we don’t notice them until we’re forced to.

When all is great, we don’t give it a second thought, but as soon as troubled waters hit, they become much more important.  Keep this in mind as you look at your next monthly budget.

Remember, it’s not only there for your safety, but it will also help build your future if you let it.

 

 

 

 

 

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David the Wealthy RN

David is the creator of The Wealthy RN. Although I'm not your financial advisor [nor offering financial advice], I can share what 20 years of hard financial lessons have taught me: how to effectively budget, save, and invest creatively. Read my story on how I went from tens of thousands in debt to accumulating hundreds of thousands of profits.

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