How To Make A Budget

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Imagine your favorite business being run without budget or inventory procedures in place. You might go there to shop and find your favorite business didn’t pay their rent or employees. And now you can’t get in.

Or maybe they were lucky enough to have cash-on-hand and remembered to pay their bills. But if they don’t monitor inventory, they don’t know what to buy and when they need it. 

So, now you’re in what used to be your favorite store, and none of the items you normally buy are on the shelves. There are a few things nobody wants, but nothing you’re remotely interested in.  Is this still your favorite store? 

Transpose this to personal finance, specifically your personal finances.  Do you hope you can pay your rent or mortgage, maybe a car loan, and buy some food? And with any luck have a little left for yourself? 

It’s surprising how many people live through hope. 

Take Your Finances Seriously

Unfortunately, in modern society, there are so many forms of readily available credit, that living on hope can dig people further and further in debt.  Often, it’s too late when they realize just how far in the hole they are. 

If your income isn’t substantial, there may be limited and lengthy options to get back to zero. Let alone think about putting children through college or saving for retirement. 

Yes, financial milestones will sneak up on you sooner than you think as your concept of time gets shorter and shorter. Bottom line, the benefit of budgeting is well-managed finances that contribute to wealth accumulation. 

Conversely, the mistakes are debt, worry, and living life one step in front of bankruptcy.

OK, let’s get serious about your personal finances.  Before we start, I’m going to ask if you have a budget?  No, I can’t hear you, but that question was for you, not me.  If you have one, fantastic!  If you don’t, why haven’t you made one? 

Does it make sense that you don’t know how much money you have coming in and going out each month?  Does it make sense to run your finances on hope?

Let’s Make a Budget

The simple reality is, that the cornerstone of your personal financial planning strategy at any age is a budget. 

Knowing your after-tax inputs (credits) and your actual bills and spending habits (debits) is essential to creating a consistent surplus. That is when you have extra money remaining at the end of a time period. 

I’ve found that the key to a successful budget is to account for realistic fixed and discretionary costs. Think required bills and investments versus fluctuating spending money and optional expenses. 

After you’ve established a baseline, you can continually refine your numbers until you have an accurate accounting of your monthly financial picture. 

Recurring fixed costs are pretty easy because they’re fixed and recurring.  After a few months, these figures will be accurate. 

Discretionary is a bit harder, but if you track your spending over several months, you can get a fairly accurate average. 

There’ll always be fluctuations, but the process of making a budget is not to track every cent of your discretionary spending.

It’s to give you a snapshot, make you think about whether you want to spend money on something. And then help you set up your finances to produce a consistent monthly surplus. 

When you have a consistent monthly surplus, you don’t have to track your spending that close on a daily basis. 

At this point in life, I update our budget as needed if there’s a change. Then create a new tab on Excel with an updated budget at the beginning of each year. 

This way, I have a historical record of past budgets to reference from time to time. 

Once your budget is in place and helping you produce a consistent monthly surplus, you can use the surplus money that builds up in your account to pay down debt, create an emergency fund, and/or invest. 

Just set up a simple spreadsheet you’re comfortable with, and plug in the auto sum values. That way it will automatically update every time you make a small change. 

Don’t worry, YouTube contributors will teach you how to set auto sum values in Excel in a few minutes if you don’t know. 

When I have time, I’ll make a short class that walks you step-by-step through the process. But in the meantime, do your best to get an understanding of what’s coming in and going out of your accounts on a routine basis. 

See the example below for inspiration.