It’s the best way to get a firm grip on your finances and have a plan at the same time.
The word budget brings fear into the minds of even the most hardened want-to-be-saver and have them running for the door.
But fear not, oh brave one, here I’ll walk you through the basics of what a budget is and how you create one that works.
Oh, in this post, the budget is related to your family’s finances (or personal finances) and not in a business kind of way.
If you want to read this article later, you can download it in PDF and read it whenever you wish: Download it here.
A budget is, according to some people, the most boring thing there is.
Almost all experts in every personal finance book out there recommend that you create a budget. Not because all experts are utterly boring or masochistic. But because it’s a powerful tool.
Basically a budget is a summary of the expected coming expenses in any given period of time. This period for personal use is usually a month. In a basic monthly budget you could add up all the expenses you know you will have.
Usually the different expenses are divided into categories with a budget for each of these one.
Let me illustrate what I mean, and how it could look.
Total budget $545
In the example above the monthly budget for food is $100, transportation $45, rent $350 and fun $50. That makes the total monthly budget is $545.
I’d like to stress that this is a very simple budget just to give you an idea about what they can look like. And to not intimidate you with a more real and complicated example.
To illustrate further how a budget works with some expenses added it could look like this:
Total budget $545
Total expenses $535
In this example most it looks like we were inside the budget in all categories except transportation. Since the total expenses is within the total budget, I’d say we have been within the monthly budget.
However, if it’s a trend for a few months to break the budget in a category and have a lot over in another one it could be good to make adjustments accordingly.
In conclusion of this part, a budget is basically a qualified guess of your future expenses based on your past expenses, or known expenses. You then compare your expenses to the guess to see how right you were.
The next question I’ll answer here is why you actually want to make a budget. A budget helps you keep track of where you money goes instead of wondering where it went. A budget helps you know how you can and will spend your money the coming month.
When you have predictability in your economy it’s easier to know what you can, or can’t afford. It also gives you a clear idea of how much you can save each month.
If you stick to your budget and don’t “break” it, you will in theory be able to put all the money you have left in some sort of saving. Or increase spending on the things you love. However, saving is always better than spending.
For our family, using a budget have made us able to save about 50% of our salaries each month. I’m not trying to brag, it’s just to show you how powerful it can be with a budget if you follow through.
There are several different ways of setting up your budget. Some people still use paper and pen to do this. And that’s fine if you like to be a bit more old-school - or almost prehistoric.
The writing of a budget with pen and paper is a process for some people, and I’m not here to judge. While writing they feel that they get a better view of what’s going on in their economy.
In my opinion that’s true even if you use other ways of jotting things down though, but we’re all different as people.
The other most common and popular ways to keep a budget is by either budgeting software or by spreadsheets.
A spreadsheet is usually an Excel-sheet or Google Docs spreadsheet. If you want to use this method it doesn’t matter which kind of spreadsheet you use. The effect is still the same in the end.
There are a great deal of different budgeting software on the market today. Not to mention applications for smartphones. I will just mention one in each category and then move on to spreadsheets, since this is the less ancient version of actually doing the budget yourself.
Apps and software today usually (not always though) collect information automatically if you let it.
When it comes to smartphone apps there is one name that pop up more often than others, and that’s Mint: Budget, bills, finance. Mint isn’t as much as a budgeting software as it is a money manager, as the creators themselves call it. But you can make budgets, which is why I cover it here.
Mint connects into your bank account (or other financial institution) and you get a real-time update on your accounts. When you get an expense in any connected account Mint will categorize it automatically.
As for Sweden there is an application that works in a very similar way to Mint. It’s called Tink and I have tried this myself. Mint doesn’t work in Sweden.
After our daughter was born we felt that time was really a resource we didn’t have enough of. So to save some time we decided to stop using the budgeting spreadsheet and try an application. The one we decided to try was Tink.
In my opinion apps like Mint and Tink are great because you will get a quick overview and you can make a budget. The applications also will show you when you are close to breaking, or break your budget in any category.
The downside for me has been in the same thing that is the benefit with them. It’s easy as heck. You just need to spend some time to set the budgets.
I need the process of going through my receipts and putting them in the spreadsheet. Even if this is time-consuming. Maybe I’m a masochist. But the time I have to sit and think about the numbers and actually see them change helps me feel like I have control.
Both apps are free. And it seems I actually talked about two apps in the end.
One of the more popular budgeting softwares for computers nowadays is YNAB , or spelled out You Need a Budget.
I have not tried YNAB myself, but it has become a very popular software. The basic idea of budgeting with YNAB is that you assign every dollar (or other currency) to a job.
The other idea with YNAB is to live off last month’s income, so you never have to worry about the salary covering the expenses. To get to this stage varies in time for different people.
From what I understand YNAB also gives you an overview of accounts you’ve added to the software, and it helps you prioritize which expenses to focus on.
As I’ve said, I use a spreadsheet for our budget. Frankly, it’s not just me who use it, and my wife does as much with this as I do. Which is important too, since it makes us both feel more involved in our money.
To be in control of your money, you need to take responsibility.
There are several benefits to using spreadsheets in my opinion. You can make it as complicated or simple as you’d wish. The budgeting softwares are a package where you get all they offer when you start using them.
I like to keep the functions and effects to a minimum with the budgets since it makes it easier to focus on the important stuff. The money. But I’m a bit old-school here too, I know.
In a spreadsheet you can also make very complicated calculations if you see the need for it. You can also add graphs and pie-charts and whatnot, so you can get fancy visual functions just like in the budgeting software.
If you’d rather make your own budget in a spreadsheet or other method there are a few things you need to think about.
The first bullet means that you need to define categories for all the different expenses you expect to have. You can make this with broad strokes or very detailed, it’s really up to you. I usually try to keep it rather simple with not too many categories.
Try to group things up in a logical way, that will make sense to you month after month.
There are many different categories into which you can divide your living expenses, so view the following as an example. It's the one that we use in our family.
A short explanation could be in order here. Most categories kind of explains itself. A note on the food category, where you will have to decide on if you feel restaurant visits should be part of the food budget or if you put it into a separate category. Either way is fine really, since it's just for you to know how to divide stuff.
I’ve seen people put categories like hygiene products and household consumables into the Food category and call it something else. So food could in that case be called something like Consumables.
The fun and leisure category would be for things like cinema, concerts, going out for drinks (or would drinks be in the food category?).
Transportation relates to expenses for things that get you somewhere. Gasoline for the car, fare price for the bus or train. Or you might commute by boat. Either way, it goes here.
His, her, and money for children is a category we use for things we want for ourselves. It can be whatever we want, and as long as we stay within the budget the other person can’t veto the expense. Unless it’s a really stupid thing to buy.
Like a magical, chocolate bunny.
Since our daughter is so young, the money in her category goes to clothes and other things she need.
Savings is what it says. Put all the money you intend to save here. With a budget you will see how much you will be able to save since all the other expenses are already accounted for in the other categories. What you have left could, in theory, go into the savings category.
I want to make it as easy as possible for you to get a budget going. That's why I've created a PDF cheat sheet with suggested categories for your budget.
When you download this, I will also add a bonus. You'll get access to my FREE eCourse on how to create and maintain a budget.
It's the same budget system that our family use to save between 50-70% of our monthly income.
No, I didn’t lose my mind or like to repeat myself, this really is new information compared to the previous paragraph.
You want to make sure you have all your monthly income put into the budget. This is to avoid having free floating money in your economy. Let’s say you make $3000 per month but only budget for $2750. What would you do with the last $250?
Chances are that since they aren’t accounted for in the budget, you will feel they can be used however you want. That would mean you could waste the $250 on things you don’t really need. Instead of saving them.
Or budgeting them for something you want to have a bigger budget for. Like if you’re a foodie who love going to the restaurant, put them there.
Just make sure you put all your money into your categories. If you don’t need the money in any expense category then put them into savings.
This is something I tend to nag about. But really, it depends on the system you use for your budget. If you use a system where you manually have to enter the expenses then you need to save receipts.
The main reason I talk about this so much is that you need the receipts to be able to enter the expenses in the budget. You will probably have a bank statement (and credit card statements) on the internet from your bank and you might wonder if that’s not enough. It is, in a way.
I usually double check the receipts against the bank statement. Sometimes I have posts with a fancy name of a store and I have no idea what I actually bought in that shop. That’s when it’s good to be able to go to the receipts to see exactly what it relates to.
Apart from the bank statement I also have the app Tink that I talked about earlier to add another system to check against.
As you can see I try to be a bit extra aware of where my money goes and how I categorize them. It’s because I feel it’s that important to be on top of our family’s economy.
There are a great deal more reasons to save receipts. For instance if you buy electronic devices it’s usually good to save the receipt for warranty reasons. MoneyNing has a more thorough list of reasons to save receipts.
At least here in Sweden it’s very difficult to get any kind of help with a broken device if you don’t have a receipt to show.
This bullet relates to both the continuous follow-up you do with entering the expenses in the budget. If you use a system where you save receipts, do this rather often and not just once a month. It might take a lot of time to go through all the receipts. They add up quickly.
I can tell you that in the beginning I cursed at the end of each month when I realized I had forgotten to enter the expenses in the budget, again.
You also want to follow-up on your budget. With this I mean the categories and how much money you have allocated to each of them. Do this quarterly or so.
You need to check if the allocated money is enough, or too much, in each of the categories and adjust accordingly. You also need to check if your budget is sound and if it works for you. Otherwise you will have to rethink how much you have budgeted all in all, and in the categories.
Also, if you have some sort of bigger change in your life you might need to follow-up on the budget to see if it still works. Things that might affect might for instance be that you move to another place, you get a child or your commuting costs change.
In our family we also have budget meetings once per week on sunday evening. We go through the budget and make sure we’re on track and see if we’re happy with the budget in general. It’s a good time for us to discuss our finances in a bigger picture too.
A budget is a document that takes a bit of nurturing. At first it will also be a bit time-consuming to set it all up. But the more time you spend on getting it right from the start, the less time it will take for you later to keep it updated.
If you decided to download the free spreadsheet budget that I use, you will at least not have to invent the spreadsheet in itself, which will save you time. It will also make you able to start with your budget (in pure numbers) today.
Keep your budget alive by often keeping an eye on it and make sure the values match. Don’t accept that you break the budget in any category for several months without making adjustments. Doing that defeats the purpose of the budget.
A pat on the shoulder to you for getting this far. It shows you’re dedicated to getting a better grasp on your economy.
What is your savings goal with a budget? When you’ve entered the numbers in your categories, how big percentage of your salary are you able to save each month?
Leave a comment below and let us know!
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