What’s a Budget?
We’ve all heard it before: Make a budget.
But what exactly is a budget?
A budget, at its core, is a plan for what you are going to do with your money - every day, every month and every year.
Think of it like the syllabus for class that your college professor would hand out on the first day of the semester, outlining all of the topics for that course.
Budgets are important for personal finance because you have to know where your money is going.
If you absentmindedly swipe your credit card at Target, and then stress out that your checking account only has $20, then you need a budget.
If you say no to dinner with your friends because you think you can’t afford it, then you need a budget.
If you stress constantly about money because you don’t know if you’re going to be able to afford the rent next month, then you need a budget.
What is a budget NOT?
In order to understand what a budget is, you first need to understand what it isn’t.
A budget is NOT a spreadsheet of death that’s coming to haunt you for your sins (aka happy hour with the girls last Thursday night when you said you’d only have 2 drinks and it turned into 5).
A budget is NOT deprivation. It’s not about “doing the responsible thing” and cutting out everything pleasurable from your life because you have to prioritize your student loans.
Finally, a budget is NOT a punishment. Maybe you made a mistake with your money. You bought something you couldn’t afford, you racked up too high of a balance on your credit card, or you lent your brother $500 and he never paid you back.
Let it go.
In fact, when used correctly, a budget is actually liberating because it shows you exactly how much money you can spend on pleasure and fun, while still meeting your financial obligations like rent, car payments, student loans and savings goals.
So what IS a budget?
A budget is your safety net to fall back on when times get tough. It tells you how much money you have coming in, and how much is going out. It tells you exactly what your expenses are and it tells you if you can really afford something or not.
Think of your budget like the bumpers in a bowling lane. You know the little barriers that stop your ball from rolling into the gutter?
No matter what, your ball is going to go all the way to the end of the bowling alley, but the bumpers help keep you in the lane.
That’s exactly what a budget is. It’s the bumpers making sure you stay on track, get to the finish line, and maybe it helps you knock down a few extra pins when you get there.
The secret most people don’t know about money
I’ll tell you something about money that most people don’t know: Money is 90% feelings and 10% numbers.
Yep.
Feelings are why millionaires comparison shop for strawberries at the supermarket and why poor people buy $50,000 trucks when they only make $40,000/year.
Because they don’t care about the numbers.
A budget helps you take feelings out of the equation.
Not sure if you can afford a vacation? Well, your budget says you’re meeting your household expenses, contributing 10% of your salary to your 401k and saving $1,000/month to your savings account. Book the vacation.
Want to buy a new car? Well, your budget says you’re still paying $400/month car payment for your current car. Not time yet.
How to create a successful budget
1. Income
The first thing you need to do is figure out how much income you have coming in. If you work a 9-5, this is easy. Check your pay stub or checking account.
If you work a job with irregular income, make an estimate of the lowest possible amount you will make in a month and use that. Using your minimum possible income, you should at least be able to cover your household expenses.
2. Expenses
This step can be a little intimidating. I get it. But it’s also really, really important.
Open all of your credit card statements from the last 3 months, in addition to any checking accounts you use to pay bills.
Write down all of your expenses.
You need to be able to answer this question: Am I making more than I’m spending?
3. Savings
Now that you know your income and expenses, you’ll want to decide how much you should put into savings each month.
A general guideline is 10-20% of your take-home salary, but honestly that number can vary widely depending on your financial situation and goals for the future.
If you’re a broke 23 year old living in NYC, you probably don’t even have $5 to put into savings, that’s ok for now.
If you’re 30 and dreaming of an early retirement, you’re probably going to be putting way more than 20% of your salary into savings.
It just depends on you and the goals you have for your own future.
Bonus tip: Once you decide how much to save, set up your checking account to make automatic transfers to your savings account.
4. Fun spending
Now comes the best part - fun spending!
Take your income, subtract your expenses, subtract what you’re putting aside into savings, and spend the rest!
That might look something like this:
Income - $5,000/month
Expenses - $3,000/month
Savings - $1,200/month
Fun spending - $800/month
This is the beauty of a budget: you know you have the money to cover your expenses and contribute to savings so you get to spend that $800 totally guilt-free.
If spending money on your own pleasure is difficult for you, start by treating yourself to something small.
Final Tip
A monthly budget is a great place to start, but it doesn’t always account for things that happen every few months (like an oil change for your car) or 1-2 times per year (like a vacation). It’s important to remember to zoom out and look at your yearly budget as well.
If you need some help budgeting, download my free budget template.
Action Steps
Figure out your average monthly income and track all of your expenses for the last 3 months using credit card & checking account statements.
Decide how much money you want to put aside into savings and set up an automatic transfer every month.
Spend your money! If you’ve tracked your income and expenses, set aside money to savings and still have money left over - SPEND IT! You deserve it!
Your life may not be perfect, but it is imperfectly yours. The only way to live it is your way.
