Now I know that is a bold claim, but hear me out. For most young people budgeting is a boring financial tool that no one really does. Or it’s something that the government tries to do but can’t do very well. Heck, even a lot of older adults don’t budget, and these folks aren’t exactly financially independent. Quite the opposite, actually. Most are living paycheck to paycheck, and the only thing they really know about their spending is whether their checking account is negative or positive. That doesn’t sound like an effective wealth building strategy to me. Knowing, and more importantly, choosing where your money goes each month is critical when you’re trying to build wealth.
Why You Need A Budget
Budgeting isn’t complicated, it just takes a little bit of discipline. Which is probably why most people just skip it all together. It’s much easier to charge something on a credit card than to track every purchase on a daily basis. An extra $5-10 spent here or there may not seem like much, but that could be a couple hundred bucks invested each month. You may not think that you spend that much on junk food, drinks or whatever “minor purchases” you make throughout the week, but you’re probably spending more than you realize. This is why it is so important to set up a budget and to track your spending regularly.
Yeah, I get it. Budgeting isn’t a sexy financial strategy and it’s not going to directly make you rich. It will, however, set you up so you can build your wealth more quickly and efficiently. Budgeting is like counting calories when you want to change your body. If you want to lose fat and get shredded you need to know where you’re spending your calories. To do that you need to track them. It’s the same thing for building wealth and spending dollars.
I have been budgeting for half a decade now and record my family’s spending daily. I enjoy keeping track and knowing how much we are under or over budget for each category. Even if I didn’t enjoy it I would still do it because I prioritize financial freedom. Take a couple minutes out of your day to track your spending and you’ll reach your financial goals way sooner.
Creating a budget is pretty simple and there are plenty of apps you can use to track your spending. Below are a couple of apps that I’ve used that work pretty well as well as some offline budgeting options. There are pretty much two basic ways you can setup your budget. You can set it up as a fixed dollar amount or you can setup on a percentage basis.
Fixed Dollar Budgets
This is the most common type of budget and the one most apps use to allocate budget categories. For example, if you earn $4,000 each month you would allocate a set amount for housing (ex: $1,500), car (ex: $250), food (ex: $400), etc. If you have a regular paycheck coming in with consistent dollar amounts then you know how much you’re earning each month and can plan accordingly. Most people use this type of budgeting each month, especially if they have a consistent paycheck coming in.
Most apps out there will have you enter a fixed dollar amount monthly and subtract transactions from each category. Two apps that I have used in the past are EveryDollar and Mint. Both work great but a little different. The EveryDollar app requires you to manually enter each transaction. Which is a good habit to get into. Mint on the other hand links to your checking and credit card. It automatically records and allocates your transactions to each budgeted category. It’s a good idea to still check in with Mint on a daily basis to add any cash purchases or to make updates as necessary.
Alternative Budgeting Tools
Another way to track your budget is to use an excel spreadsheet. You could go old school using a pen and notepad. I was using a notepad and doing the calculations manually up until recently but just switched back to using a spreadsheet. Here is an example on how to set up a fixed dollar budget in excel:
Here are the formulas for the spreadsheet if you would prefer to set one like this up yourself:
A spreadsheet is a nice and easy way to keep track of your budget. Each month you can just copy the sheet over to start anew. The notepad would be set up in a similar fashion. Categories would go across the top with the budgeted dollar amount underneath, and then just subtract transactions as they occur.
Percentage Based Budgets
The alternative option to use for budgeting, and the one that I prefer, is percentage based budgeting. This type of budgeting method is great for those who earn more sporadically than those with consistent salaries. By using a percentage instead of a fixed dollar amount you allow yourself more flexibility in times when money is tight. If you budget your income based on percentage (ex: housing 40%, food 15%, giving 10%, investing 15%, etc.) then you can adapt more easily to your current financial circumstances.
Kristin and I use this type of budget because although we earn a steady income the amounts can fluctuate depending on how much we choose to work each month. If some months we work less we spend a little less on “extras” and investments. Similarly, on the months we work more we have a higher percentage available to put towards the mortgage, investing, or fun activities.
It is important to note that you should budget your percentages on the low end of what you usually earn. That way when you earn less in one month then your basics (housing, bills, and food) are covered. In the months you have bigger paychecks you can create greater margin in your budget for when you need to tighten your belt. I’m unsure of any apps that allow you to budget based on a percentage. The apps I mentioned do show the percentage breakdown, but it is just the percentages of each category related to the fixed dollar amount you’ve set. (If you know of any apps that uses percentage based budgeting let me know in the comments!)
Below is an example of how I setup a spreadsheet for percentage based budgeting:
And here are the formulas so you can create your own spreadsheet:
Again, once you got the formulas set up it’s just a matter of copying and pasting a new sheet at the beginning of the next month. You could even keep everything on one page and do it yearly if you wanted.
Allow For Margin In Your Budget
Something I always do with my budget and with my finances as a whole is allow for margin. By margin I mean cushion, safety net, padding, buffer,.. you get the idea. When I set my budget percentages I make sure I leave a little room in each category for the month.
If our family brings in $4,050 after taxes then I’ll budget at $4,000 and have the extra $50 be a reserve in my checking. I’ll do the same thing for each category. Let’s say we usually spend $430 each month on food and stuff. So for our food/stuff category I may budget at $450 or $500 (or whatever percentage of my budget that comes out to). This way if for whatever reason we end up spending more one month we are still covered in our budget.
In addition to padding my budget I also “round up” the cost of the transactions when I add them to the budget. I use Acorns so when I make a purchase on my credit or debit card they automatically round up to the next dollar and invest that amount. So if we spend $87.24 on groceries on week Acorns will round up $0.76 into my Acorns account to invest. When I add this $88.00 ($87.24 groceries plus $0.76 acorns round up) to my budget I will enter it as $89.00 or sometimes $90.00. Something that cost me $87.24 is now showing up on the budget as $90.
This way I have an additional safety net building up every day in my checking account in addition to my savings/emergency fund. Just an extra layer of margin for the unexpected. Now just because I know that I have some wiggle room in my budget doesn’t mean I abuse it. I always try to stay under budget and keep growing my safety margin.
What Happens If I’m Over/Under Budget?
Well first off, if you go over budget just subtract the amount you went over on next month’s budget.If you keep going over budget a few months in a row, and it’s not due to frivolous spending, then it might be a good idea to reevaluate how your budgeted amounts.
If you have money left over you can do a few things. What I highly recommend is any money you have remaining at month end should be put towards debt or invested. Depending on your circumstance and your attitude toward debt one option may be more beneficial than the other. Or you could simply roll the remaining amount over to next months budget to allow for leaner months. You could even do a hybrid of the above. It’s up to you. You’re the one who was diligent on coming in under budget, good job!
Hopefully this has helped you get an idea on how you would like to budget your money and has given you some options on how to go about setting one up. Budgeting is so important in building wealth and there’s no excuse for not doing it. Find what works for you and stick with it!
Action Items (Est. Time)
- Determine your financial priorities (20 mins)
- Pick a budgeting tool and setup your budget (20 mins)
- Track your spending daily (continual)
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