How to Budget: The Ultimate Guide

How to Budget

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How to Budget

Five years ago, my husband and I budgeted our way out of $266,000 debt.  If we can do it, you can do it too!

The word “budget” had a terrible connotation for me. It felt like a 5-letter bad word.  I had the misconception that it was boring, too constricting, and controlling. I basically had no idea how to budget, or what it entailed. 

As it turned out, this journey I called budgeting, set my husband and I free! We have been budgeting for the past 8 years, and we budgeted ourselves out of $266,000 of debt, you can read the full story here

How to Budget Infographic

How to Budget Money

The awesome thing about budgeting, is that it provides you with a foundation that can be applied across many different platforms: how to budget your time, your money, and resources.  Budgeting is an incredible skill to hone and practice.

In your home, you do your best to make sure that you take care of  it. You take preventative measures to ensure your home is safe and have a backup plan should something arise.  We should practice these same ideas with our money. 

What is your motivation to budget?

What are your reasons to achieve financial freedom?  I have learned that for any goal you set in life, if there isn’t enough tenacity and passion behind it, it’s not going to be attainable.

In nursing school, I learned that people will only change if THEY want to.  You can desire someone to change, like your spouse, but ultimately, they decide if they want, otherwise it is pointless.

My humbled advice to achieve a successful budget, is to start thinking about your financial goals, and use those listed items, to fuel your passion to sustain your budgeting journey. 

Here are some common reasons to start a budget:

*Are you tired of living paycheck to paycheck? Are you exhausted of just having enough to cover your expenses? Do you feel like your money is slipping through your fingers and you don’t have anything to show for it? I see you, I hear you, and I feel your anguish because I’ve been there!! This is a difficult way to live, and getting on board with a budget is the first step to end this vicious cycle.

*Want to pay off your debt? Is it piling up and feeling overwhelming? I am here to tell you that there IS a way out of debt.  It’s not easy, but it’s doable with a plan, and your willingness to work hard for those dreams!  

*Would you like to pay off your mortgage? One of the final steps in achieving financial freedom is to get rid of that mortgage!  Repeat after me: the amount of money that you will pay in interest on your mortgage will never be worth keeping your mortgage around! If you can free up that huge monthly expense you will be winning financially! 

*Do you plan on paying for your children’s college education? That makes two of us!  I paid for my education at the junior college level when I was studying to become a nurse. Fortunately, my parents paid 3 years of tuition at California State University of Los Angeles for my Bachelor’s Degree in Nursing.  That was one of the greatest gifts they have ever given me, and it was a complete blessing to be able to start my marriage without student loans (although I did have credit card bills). 

*Early retirement? You got this! Mr. Money Mustache did it!!! Imagine how awesome it would be to know that you are the owner of your time, not your employer. If you don’t have any outstanding debt, and lots of money saved, you will have complete control of your most precious resource: time.  

Budget accountability partner

How to Budget Pin

One of the most important aspect of this journey, is having an accountability partner that you trust, and respect.

Since I am married, my husband, is my accountability partner.  He gets the pleasure of dealing with my free spirit, and reining me in from time to time! Ha!

If you are single, I would suggest choosing someone who will hold you accountable to your goals, someone that you trust, and not someone that will enable you to buy that $500 purse when you can’t afford it! Set forth a plan or schedule to check in with your accountability partner on your budgeting project, and try to be consistent in your meet-ups.

A few rules that my husband and I have as far as being accountable partners:

*Try your best not to go over your budget.  Things will come up, and there are times and reasons that will make you overspend.  Being continually mindful of when these situations arise, and letting your partner know that you had to spend a little extra in groceries, or you really needed underwear and failed to remember since you tend to put others first. Just know these things happen unexpectedly. If we have an expense that is over our “fun” money cap of $50, we talk about it, sleep on it and make a decision the following day!  

*We conduct our budget meeting in a respectful manner, and we listen to each other’s opinions.

Track your Spending and your Bills

Knowing how much you spend in a month is vital when preparing a budget.  Not only should you know how much you spend on variable items, but you should also be aware of your monthly, quarterly, bi yearly, and yearly bills.

  • Variable Expenditures: These would be things that vary month to month.  Some examples are gas/fuel, and some utilities. How much will you be driving this month? Going on any roadtrips? Another example is Non-Christmas Gifts.  Do you need to purchase birthday, baby shower, or wedding gifts? Clothing is always a variable expenditure for us. Lately I have been using Mercari to buy name brands that are gently used and new items for discounted prices.  
  • Fixed Expenditures:  These are fixed expenses, both monthly, and yearly.
  • Monthly, fixed expenditures: These are expenditures that you pay the exact amount for every month. Your phone bill is typically a fixed, monthly bill (unless you go over your plan’s parameters).  Your car insurance can also be paid monthly. NOTE: Some insurance companies will give a discount If paid in full.
  • Yearly, fixed expenditures: Transitioning your monthly bills to yearly bills can provide a positive impact as some companies offer yearly discounts.  We pay our term life insurance annually. We chose not to have whole life insurance and will address this topic at a later time.  If you are seeking a term life Insurance, I would suggest checking out Ladder! Their online application takes about 5 minutes to complete and you get an instant decision on your coverage.

Decrease your Expenditures

  • Review your annual price check for utilities.  Check to see if anyone else would like your business for less than what you are currently paying.  We were able to reduce our cell phone bill, and internet by switching phone providers.
  • Substitute buying new items with gently used, when applicable.  Let’s say you are looking for a new Patagonia jacket for the winter season (because they are an excellent brand with lifetime guarantees on their products), and you don’t want to pay the high cost.  Instead, save money, by checking online websites such as: Craigslist, local Facebook groups, Mercari, Ebay, garage sales, or Offer up where the low costs deals are endless! 
  • Buy in bulk:  There are bargains available when purchasing in bulk, especially when it comes to groceries.  Perhaps you go shopping at Costco, or Sam’s Club, and love their produce, but can’t finish it all before it goes bad.  Whenever you find a good deal at your local market, buy a big portion, ration it out, and freeze it for later! Meat, chicken, fish, fruit, vegetables, bread, tortillas, cheese, and even sauces can be frozen for later meals.
  • Meal plan: This can single handedly save you LOTS of money!!!! Once a week, write out your meals that can revolve around the weekly grocery sales.  Go grocery shopping, prep your food in advance, and you will see how much you save by dining in instead.  

Calculate Your Monthly Income

How to Budget, Ynab example
Faux, Example Budget in the YNAB application.

This is one of the most important steps.  You cannot spend money without knowing how much you can afford.  YNAB is an application/app that recommends creating a one month buffer, so that you are always living off the money you made last month! This has been revolutionary for us, and I hope it works for you too.  Not living paycheck to paycheck is incredibly liberating! This may not be an immediate goal of yours, but definitely something to work towards!

Fixed Income: If you have a salaried job, then this should be fairly easy to calculate:  Tally up your household income and use that as your starting budget. The process that my husband and I use to budget, is that we GIVE EVERY DOLLAR A JOB, just As YNAB and Dave Ramsey recommends.  Every dollar is accounted for, even if it goes to savings.

Variable income:  A fluctuating income is also manageable when budgeting.  Your basic budget template should start with the lowest dollar amount you made the previous year (whether it’s the lowest paycheck, or your lowest monthly amount is dependent upon on whether you are budgeting each paycheck, or monthly).  By using this process, you always know that your essentials are covered, ie utilities, groceries, mortgage, rent etc. In the event you have extra income, you can prioritize which budget categories can be addressed next.

How to increase your income

How to budget-Mercari Screenshot
Snapshot of my one month earnings from Mercari.

When you start your first budget, and see the results of your hard work, you begin to see the savings and that can lead to other goals. You can create an emergency fund, add to your one-month-income buffer, or start a vacation or savings goals.  When my husband and I were paying off our $266,000 of debt, we did everything we could to make more money, and spend less.  It was a difficult 33 months, but looking back, I’m so glad we made those sacrifices to become debt free!

  • Extra shifts.  If you work in a job where this is possible, start scheduling some extra hours. The key here is to keep living off the same monthly budget, and the extra income  can go directly to emergency fund savings, or to paying down your debt!
  • Get a second job!  I was very grateful to pick up a second job as an emergency room nurse. The goal here is to choose a second job that works for your schedule. Whether it’s restocking or cleaning a store at night, walking dogs, or an Uber, or Lyft driver, there are lots of options available!
  • Become a VIPkid teacher.  You can earn up to $22 an hour from home if you meet the requirements of the company. Some requirements are: Bachelor’s Degree in any field, having a desktop computer, and internet. 
  • Sell things you no longer are using on Ebay, Mercari, Craigslist, Offer up, Facebook pages, or host a garage sale!   I was blown away when I made $270 on Mercari from selling clothes from my closet that I was no longer wearing! Now would be a good time to check your household inventory, declutter and see what can be sold. 
  • Get a roommate.  If this is possible, this can quickly expedite increasing your income for your budget!  I’ve known some people that have their children share a room, and rent out rooms to roommates!  
  • Refinance your home.  Is it possible to decrease the interest rate on the life of your loan?  If you want to see if this is worth it, calculate how much interest you will pay over the life of your loan at it’s current rate, and compare that same calculation with the new interest rate? Is that amount of money worth refinancing? If you can decrease your interest rate 1-2%, the answer is yes! 

Monthly Budget Meeting

How to budget-Budget Meeting

My fondness for our monthly budget meetings has grown exponentially since we started.  When we first started, they were difficult because we had no idea what we were doing, AND we were making decisions about all of our finances for the first time, together.

Eight years have past since having our first monthly budget meeting, I can tell you that it gets easier, and more enjoyable.  When you have established your emergency funds, and a one month income buffer, you don’t feel like you are in crisis mode. You feel like you have the ability to make sound decisions for your family, and even set up fun goals like vacation savings, or birthday party savings!

You may ask, what is entailed in a budget meeting? It’s a culmination of the first several steps that have already been addressed:

  • Establish your total income that you have to budget
  • Budget for your most important categories first.  My husband and I do this by putting asterisks next to the budget categories that are a priority for us.  For example, some of our “asterisk” categories include: tithing, mortgage, and all of our utilities, 
  • Review your upcoming calendar events to see what activities are coming up.  When making variable expenditure decisions, such as gas, groceries, dining out, toiletries, and household supplies, I check my calendar, my current household inventory, then I make a decision about how much I will need to fulfill those categories.  
  • Zero-based budget means keep budgeting until you have $0 left.  It’s important to assign every dollar to a category in order to be mindful with your money!  More on that below.
  • Make sure that your expenditures are less than your household income.  If it’s not, then review and make changes accordingly and quickly!  When your expenditures are consistently greater than your income, you are more apt to go further into debt, and operating in a constant state of crisis.  This can be financially debilitating as well as crippling for your marriage, and family life.  
  • Automate your finances.  When we were first starting out, we figured out how to automate our money during the budget meetings.  I believe that time is money. We have automated just about every bill payment except our mortgage and property taxes. We don’t automate our mortgage because we want to be very intentional about making that huge payment every month, and it’s on the checklist to accomplish every budget meeting.   It’s always a good idea to regularly check in when your payments are automated to make sure that you aren’t being overcharged. There have been instances when we have been overcharged for bills. It’s best to be proactive and review statements to give yourself peace of mind.  
  • When stuff happens, just roll with the punches and give yourself grace.  At the end of every meeting, my husband and I shake hands after we have given our budget a final once over.  Here is the thing: No budget will ever be perfect. Life happens, and things will come up to deter you from your goals.  You will go over your budget categories. Expect budgeting imperfections and roll with it. Even after eight years of budgeting, we still go over our budgeted items in some categories.  This is because life isn’t perfect or controllable. We do aim to stay within our budget as much as possible, but when we don’t, we take money from another category that has a surplus to cover our spending.  

Budgeting Systems

The Three most popular methods of budgeting are the Zero-based budget, the 50-30-20 budget, and the envelope system.

Zero-Based Budgeting

This is the method of assigning every dollar a job in your budget.  This means that your all of your expenditures minus your monthly income equals zero.  This DOES NOT mean that you have no money in the bank. This simply means that every single dollar that you made has been assigned to a budget category, whether it’s groceries, rent, savings, or bills.  This is the method we have been using the past 8 years. This is a purposeful way to make your money work for you.  

Envelope System

How to Budget-Cash Envelopes
Photos of my old cash envelope wallet that my Mother-in-law made us.

For certain budget categories, you can withdraw cash, and keep them in envelopes that you use when spending on that category.  For example, if I budgeted $400 for groceries, I go to the bank, withdraw $400 cash, write on my “grocery” envelope the starting amount, then I keep a running tally on the envelope as the month goes by. 

With this method of budgeting, there is a clear, finite amount of money per envelope, and once that money is gone, it’s gone. There are studies that show that we are less likely to make emotional decisions when we spend with cash. 

In the past we utilized a cash envelope system for certain categories, but we stopped about 6 years ago after I lost the entire wallet of cash envelopes twice (they both were miraculously found, and returned fully intact). I have just began to think about bringing the envelope system back for my grocery, fun, dining out, and entertainment budget categories.

50-30-20 Budget

This method of budget suggests that you spend 50% of your monthly income on necessities, 30% for wants, and 20% of your total income to savings and debt repayment. 

I’m not keen on this method of budgeting. I feel like every home, and income are so varied that it’s hard to find a one-size-fits-all method with these percentages.  If you are doing a zero-based budget, this is much more specific, and deliberate about making decisions with your money instead of a generic percentage.

Set some Financial Goals

I love the quote by Zig Ziglar: “If you aim at nothing, you will hit it every time.”  The same is true for your money. If you have not set any goals, then you will never achieve any financial goals.  I challenge you to set some goals for yourself! What does financial freedom look like to you? Here are some financial goal setting inspiration:

  • Stop living paycheck to paycheck.  Get out of crisis mode! Decisions are best made when you don’t operate in survival mode.
  • Live off last month’s income.  This is the beauty of having a one month income buffer, you not only get out of living paycheck to paycheck, but you transition to having a full month between when your money was made, and when it is spent.  
  • Build a fully funded emergency fund.  If you can save 3-6 months of your monthly household income, you have bought yourself some time, and options in the event that someone loses a job, or has an injury or medical issue.  
  • Save for a family vacation!  Last year my husband and I were invited to a friend’s wedding in Kauai.  We had 1.5 years to plan and save for it, and that’s exactly what we did.  We were successful in making it a family trip, and were fortunate to have my mom, and tia (aunt) join us and watch our children for the wedding day and night.  My next dream vacation will be a family Disney Cruise. I know that they are expensive, but worth it. My parents took my sister and I on two separate Disney cruises when we were growing up, and I still have fond memories from those trips.  Set a goal, a timeline, and decide what you will do to make this happen!
  • Save for your children’s college or for your own on-going college expenses!  I was very fortunate to have my parents pay for my university tuition at California State University of Los Angeles.  I was able to start my marriage without any student loan debt (I did have over $3,000 of personal credit card debt). Besides paying your children’s college expenses, maybe it’s your desire to go back to school? Imagine paying for your tuition with cash, and not having loans.
  • Whatever your goals are, whether it’s paying off your debt, your mortgage, retiring early, taking a vacation, or buying a car, make sure that your goals are measurable, and have deadlines.

Budget Categories

How to Budget-Budget Category Checklist

I love to geek out on all things budget-related.  I actually geeked out big time when I wrote this epic post about Budget Categories!

What is important to understand about Budget Categories, is that the Master Budget Categories will typically be some variation of the following:

  1. Food
  2. Transportation
  3. Recreation
  4. Personal
  5. Clothing
  6. Children
  7. Utilities
  8. Home Improvement
  9. Medical
  10. Insurance/Taxes
  11. Work Expenses
  12. Debt Payoff
  13. Vacation
  14. Charity
  15. Wish List
  16. Emergency Savings

In the budget category post, I then broke down these Master Budget Categories into over 100+ different subcategories.

If you are just starting out on your budgeting journey, I suggest you download my free budget category worksheet, and start there.

As you progress in your budgeting journey, I would HIGHLY recommend breaking down your master budget categories into detailed subcategories.  This way, everything is accounted, and planned for appropriately.  For example, in our “food” category, we break it down to 5 different categories which include “beverages” and even our “costco membership.” 

Budgeting Apps

My husband and I prefer the budgeting app:  You Need a Budget.  I love YNAB like I love chocolate.  There will always be a sweet tenderness in my heart for it! From the net worth graphs, to the age of money feature, there are so many things I love about YNAB!

YNAB is the budgeting app we have used for the past eight years, and it’s also the app we used to budget our way out of $266,000 of debt!

There are many features that we love about YNAB! Here are some of our favorites:

  • Automatic syncing to your partner’s phone! This means my husband and I can both be out grocery shopping, and know exactly how much is left in our “grocery” budget category in real time!
  • You can see your net worth! This was incredibly encouraging when we were paying down our debt.
  • It’s easy to set goals in your budget categories, and YNAB helps prompt you along the way to reach your goals! 
  • Their customer service is incredible! My husband once had a detailed question, and they responded to him with a video demonstration personalized for him! Amazing!
  • They have lots of resources! From their blog, to their podcast, and book, Jesse Mecham has done an incredible job of giving YNABers lots of guidance in their budgeting journey!

We pay an annual fee for YNAB that we find it to be worth every penny for all the features that it offers and it’s customer support assistance!

Personal Capital: Another popular budgeting app is Personal Capital, this offers lots of free features.  Personal Capital offers assistance with retirement planning, wealth management, investing, 401k, and budgeting.  They also have a dashboard where you can see things like your savings, retirement progress, all of your linked accounts, and net worth on one screen.

Mint: This is a free budgeting app that offers things like weekly summaries, credit score tracking, and goal setting.  Some con’s I’ve heard are: lack of specific report generation, no reconciliation, and synchronization issues with your bank.  

Every Dollar: This budgeting app created by Dave Ramsey has a free option which includes email support, and a paid option which includes phone support and syncing with your accounts online.  Every Dollar promises that you can start a budget within 10 minutes, and this is true! It’s very easy to use. If you do get the free option, the biggest bummer is that you have to manually enter all of your transactions.

Budget Template

Perhaps you aren’t ready to commit to a budgeting app, or you love to keep track of your expenses by writing it down? 

There are many options available for budget templates!  You can download my free, simple budget template to get you started!

Whether you go with a written budget template, or a budgeting app, find the one that works best for you! It may take several months to figure this out; I promise it will be worth it when you get your budget squared away and start achieving your goals! 

Financial Freedom

How to Budget Pin

There are so many different meanings of financial freedom.  According to Wikipedia financial independence is when “you have enough wealth to live on, without working.”

For me, financial freedom means, your time is your own.  You can continue to work, you can retire, you can volunteer, or you can work as a greeter at Walmart! Whatever your heart desires is what you get to do everyday, because you have done the planning, the hard work, paid off your debts, and now you’ve officially earned your own your time! Congratulations!

If this is something you desire, I want you to feel encouraged that you can do it! Is budgeting difficult at the beginning? Absolutely it is!  Does it take consistency? Yes again!. Is it hard work? But of course! Is it worth it? Undoubtedly yes! If you would love more tips on how to save money, make money, and more tips for living well on a budget, sign up for my email list!

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