How To Create A Stress-Free Budget In 3 Easy Steps

Is the amount of debt you have……..

keeping you up at night? Does it seem like there is never enough money to go around? Not sure how to get back on track with your financial goals?

If so, then this week’s article is for you!

A foundational piece to controlling your spending and achieving your financial goals is creating a budget.

Today, we will talk about the importance of a budget, why people think it is hard to do, and 3 easy steps you can start TODAY to create your own budget.

Before we get started, these are the 3 steps we will discuss:

• Create A Baseline
• Set Priorities
• Customize and Track The Budget

Why Is A Budget Important?

If you want to control your spending and achieve your financial dreams, you need a budget.

To get on track and stay on track, most people need some way of seeing where their money is going each month.

A personal budget is a summary that compares and tracks your income and expenses for a period of time. In other words, a budget will show you how much money is being brought in and compare it to all the expenses being paid for (i.e., housing, food, clothes, entertainment, etc.).

Making a budget helps you plan for future expenses, provides insight into your spending habits, and assists in curbing overspending.

In the end, a budget is all about priorities…. your priorities. It’s about assigning a dollar value and ensuring that you are making progress on those priorities.

By understanding what is REALLY important to you, a budget will make it easier to save for financial goals, to be a more efficient spender, and put you in control of your money NOT the other way around.

The problem most people face is they think creating a budget is hard. Let’s discuss why they think that way.

Why Do People Think That Budgeting Is Hard To Do?

Let me tell you from experience it’s not!

For many people, a budget seems like a drag on their lifestyle, that it is restrictive, and that it is too difficult to set up and maintain.

I talk a lot about why people don’t like budgets in this article……

Why Budgeting Sucks And Why It’s Important

Here are the real reasons why people think budgeting is hard….. they think it means you don’t know how to manage your money.

Budgets have an undeserved reputation and stigma that using a budget means a person is not financially knowledgeable or disciplined.

It’s hard to admit you are not good at something especially finances. It’s embarrassing to have to admit that you are failing.

I know firsthand. I grew up in a household where asking for help and admitting failure was looked down upon, opened you up to shaming & abuse, and was considered a sign of weakness.

Budgets also have a stigma for creating stress and anxiety. In reality, a budget will actually lessen anxiety because it creates a roadmap towards success. Just follow the path you’ve laid out and all your dreams can come true!

When your budget starts working for you…..

• The burden of living paycheck-to-paycheck will fade away
• Your debts will be systematically reduced until gone for good
• Impulse buys become a thing of the past
• You’ll reach your financial goals faster than you could have imagined
• You’ll be empowered to live the life you want and love

The real trick is to figure out a way to track your finances that works for you and your situation. There are several budgeting methods, I’ve discussed in the past….

Different Strategies For Budgeting Your Money

However, if just starting out and it seems overwhelming, don’t worry I’ve been there.

Today, we’ll discuss 3 easy steps you can start on today to building a simple budget to get you on the right track.

All you need to get started is a pen and paper, a calculator, and a little time. Hell, make it fun and pour your favorite cocktail while you’re doing it!

Who said it had to be boring? Lol 😊

1. Create A Baseline

Creating a baseline means you must understand how much money is coming, how much is going out, and what’s left over (if any).

Creating a baseline gives you a starting point to work off of and answers the question, “Where Am I At Right Now”?

We’ll break this step down into 3 easy and manageable sub-steps:

Look At Your Expenses First

The first thing you need to do is gather your bank and credit card statements for at least the last month (preferably 3 months). This needs to be done to understand all the monthly expenses taken out of your accounts and how much monthly income is deposited to your bank account.

Next break out the expenses into 3 categories:

• Personal Loans
• Everyday Expenses
• Splurges

Personal loans include your student loans, car loans, credit cards, HELOC’s, and any other personal loans you may have.

Everyday expenses include things you always spend money on each month. Everyday expenses are things you either need for living or you THINK makes your life easier. Everyday expenses include rent/mortgage, food, clothes, utilities, car / home / renter’s insurance, automobile fuel, cell, internet / cable, online subscriptions, streaming services, gym memberships, car registration, etc.

Before we continue, I just want to point out that some of these expenses have natural overlap with the next category and we will address that later in the article. The reason for that is one person’s “need” in another person’s “splurge”.

For example, I work from home and need an internet connection. Paying for one is a need for me or else I cannot earn a paycheck. For others, they see the internet as a convenience since they work outside the home all day long.

Remember, it’s all about perspective. 😊

The last category is what I call “splurges”. It’s your fun money to do with as you please. We all have hobbies and interests. That is ok. We just need to account for it in the budget.

Examples of splurges could include entertainment, eating out, hobbies, “toys”, travel, gifts, etc.

Once you gather all your expenses, take a pen and paper then write down the name of each expense under the 3 categories we just discussed and its monthly payment. Make sure to do it on half of the paper with space to make adjustments because we will need the other half for the next step.

Figure Out How Much Income Is Coming In

Next, we need to understand how much money is coming in.

Go to your bank statements and paystubs to find the amount of money you earn monthly after taxes. We need to know what goes into your account not what Uncle Sam takes from you.

Makes sure not only to include your day job, but any side businesses, side hustles, child / alimony support, etc. Basically, anything Uncle Sam collects income tax from you needs to be listed.

Make a list on the other half of the paper with the name of the income source and how much you earn each month. Be sure to leave space for a 2^nd column. The reason will be explained later in the article.

Create Your Budget

Lastly, add up the expenses and income columns you created then subtract income from expenses. The remainder is what cash you should have leftover each month.

What did you find out? Do you have cash leftover? Are you in the hole each month? Net zero?

Congratulations you’ve just created your 1^st budget! Easier than you thought, wasn’t it?

Now that you figured out your 1^st budget, let’s look at what you want to accomplish.

2. Set Priorities

Setting priorities means you pick and choose where your money is being spent since it is important to you. A budget is the embodiment of the priorities being set.

If you budget money for a vacation to the Caribbean, then guess what’s being chosen? Same thing if you choose to save for a down payment on a house.

Setting priorities gives you something to work towards and answers the question, “Where is my money going”?

We’ll also break this step down into 3 easy and manageable sub-steps:

Make Promises To Yourself

A lot of people will tell you to always start with goal setting. I disagree.

As I talked about in these articles I wrote previously,

5 Steps To Improve Your Money Relationship

10 Steps To Level Up for 2022

5 Financial Habits To Create For 2022

5 Financial New Years Resolutions For 2023

7 Ways To Jumpstart You Finances

a promise is the declaration of a commitment to meet an objective and follow through on your word. Keeping a promise holds a lot of emotional value and is more personal. Only you can make or break a promise.

The reason a promise is so personal is because keeping a promise usually involves hard work, commitment, and is taken very seriously. This is why it is so hard to walk away from a promise.

A promise becomes the foundation for setting priorities.

Creating a promise to achieve your financial priorities could look like the following:

• I will payoff my debt
• I will start an emergency fund
• I will save for a down payment on a house

Once the promise(s) are established, the next step can happen.

Create Goals

At its core, goals are just ways to measure and track progress. That’s it.

Once the promise(s) are set, goals can be created that will be used to track progress, measure results, and outline the plan.

Because of this, goals are much easier to break than promises. If you set a goal and don’t achieve it, people treat it as no big deal.

However, if you break a promise, heads tend to roll! Lol 😊

Goals that align to the promises listed above could look like this:

• I will payoff $3,000 of debt in the next 12 months.
• I will build my emergency fund to cover 3 months of expenses which is approximately $10,000.
• I will save a 20% down payment on a $200K house ($40,000) in the next 12 months.

See the difference?

If I miss the goal targets, it’s unfortunate but I can re-adjust the targets. However, the underlying promise is still there.

After you setup your goals and align them to the promises established what should you do?

Create A Plan That Aligns To Priorities

Now that you have created promises and set goals, the next thing you need is a plan to achieve the priorities.

The plan is the “how” things will get done and the path you will take to achieve the priorities that were set.

For example, let’s use the saving a 20% down payment on a $200K house ($40,000) in the next 12months.

Now that we have measured success, we need a plan for how to get it done.

We decided that we need $40,000 set aside in the next 12 months. Next, we need to understand how to save the $40,000 needed. Do we have enough surplus cash each month to meet that goal? What needs to change to achieve that goal?

For example, to generate $40,000 in the next 12 months, we need to be able to find about $3,333 a month in cashflow. If the current budget only has $400 a month left over to save for the down payment, how do we plan to achieve this goal?

Are there any expenses we can cut? Any loans we can consolidate to free up cash? Can a side hustle be started and how much money do we need to generate with the side hustle?

All these factors need to be taken into account when creating the plan to achieve the goals and priorities set.

Which leads us to the final step.

3. Customize And Track The Budget

Now that you know what you want, odds on your current budget won’t get you there. That’s ok, this is part of the process.

Part of the plan being developed is to figure out how to optimize your budget. This means looking at both the income coming in and the expenses going out.

One great move I’ve used to bring more income into my pocket with no extra effort is to adjust my W-2 withholdings. This way, instead of getting a big tax refund each year, I still pay my taxes in full and have extra cash in my pocket each month.

For example, let’s say you regularly receive about a $4,000 tax refund every year. By taking out extra withholdings, you could potentially put another $333 in your bank account each month!

A rule of thumb to ensure you maximize the money in your pocket and still cover taxes is to figure out the maximum number of W-2 exemptions allowed and then withhold the “max exempt-1”.

For example, let’s say you are allowed to take out 10 exemptions. To cover yourself, change your exemption withholding to 9.

It takes 20 minutes and puts tons of money in your pocket.

You may want to look at a side hustle. If interested, I wrote a great article on some easy ways to earn extra income.

10 Easy Ways To Earn An Extra $1,000 A Month

Now for the expenses side of the budget, let’s look for ways to reduce expenses.

For all your personal loans, can any of them either be consolidated or renegotiated to lower your monthly payments?

For everyday expenses, can you find cheaper alternatives (i.e., cheaper cell phone, cable plan, or insurance) or is there anything you can cut out that you haven’t used in a while (i.e., online subscriptions or that expensive gym membership).

For pricing cheaper insurance, check out Policygenius. It’s a great site for pricing comparable insurance and find a better deal.

For splurges, it’s important to treat yourself because why work so damn hard if you can’t enjoy some fruits of your labor, right?

However, if you have a $5,000 travel budget, maybe you could find some fun yet inexpensive alternatives for the next year or so while you right-size your finances.  I wrote an article with some great ideas for fun yet inexpensive vacations.

12 Ideas For A Budget Friendly Vacation

Likewise with your entertainment and hobby budget, if you find yourself spending several hundred dollars a week on it, maybe you should consider some alternatives for the time being. I just happen to have written an article about that as well.

10 Ways To Live A Fun Life On A Small Budget

Once you have gone through the entire budget and found ways to reduce costs or optimize income, update the budget in the 2^nd column under both expenses and income and re-calculate.

Did you hit your target? If yes, great! Woo Hoo!

If not, don’t worry, keep going through it. Keep adjusting things until it works out or you re-assess the goals that were set.

Once your new budget is set, now all you need to do is track the budget. For starters, go in and assess monthly for at least 6 months. It only takes about 20 minutes a month and will get you in the habit of tracking progress. The key question you need to ask yourself is, “Does every dollar align to my priorities”?

Once you are in the habit, you can still check monthly if you like or back off to say every 3-4 months. Maintenance does not take long but is important.

After several months of tweaking the budget to your liking, you can make the process even easier by using a budgeting app like Mint, Empower (formerly Personal Capital), Cleo, Rocket Money, Trim, Stash, You Need A Budget (YNAB) , or a boatload of other budgeting apps to do all the heavy lifting for you.

Now you may be wondering why I did not state this in the first place….. I have my reasons. My primary reason is by writing it out and doing manual modifications, you buy into the process and own it.

It’s way too easy to have the app do the work for you and not understand the process it took to get there.

This is why I recommend using these apps AFTER you do the dirty work by hand or Excel.

Summary

A written budget is a great tool that allows you to plan how to use your money, to understand your priorities and to give every dollar a job to do.

While making a budget may not sound like the world’s most exciting activity, it is definitely an important one for keeping your financial house in order.

That’s because a budget relies on balance to meet your priorities. If you earn more yet spend less, you can have the money needed to the fund projects you want to do like building an emergency fund, buying a house, investing for FIRE, and so much more!

The hardest part is to make the decision to get started. Like I said before, with just a pen and paper, a calculator, and a little effort you can make it happen!

Remember, a budget is all about starting with a baseline on how your money is being spent today, setting your priorities, and then customizing it to match the priorities you set.

If I can do it, you can too!

Until next time…….

Live The Life You Love, Want, And Deserve! 😊

 

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