I get a lot of grief from my family for being frugal. I don’t mind it. It’s always lighthearted. But a couple of months ago my sister-in-law asked me to send her a spreadsheet for creating a budget. Oh, how the mighty have fallen…
I dug through an old flash drive and found an Excel file I had used before. It wasn’t much, basically a table with spending categories and a graph to display it all.
What I didn’t recognize at the time, though, is that you can’t just enter expenses into a spreadsheet and expect there to be money left over.
First of all, manually entering your expenses is ludicrous, and anyone who isn’t a robot will eventually lose interest (no offense Mark Zuckerberg). I’ve tried tracking every penny this way. All it did was waste time that could have been spent towards something useful.
Instead, a budget is more like a system. And a good system has the best tools. The financial world offers plenty of resources to help create a bulletproof budget. It isn’t as bad as it sounds. I created my budget in 5 simple steps using a handful of practical tools.
Step 1. Determine Take-Home Pay
As you might guess, starting with income is the cornerstone for creating a budget. But you can’t get far unless you determine take-home pay. To do this, I had to calculate my income withholdings, social security contributions, and other tax stuff I should probably understand. I recommend using an income tax calculator because it will be pretty brutal trying to do it on your own. I’ve searched all over, and this is the most user-friendly calculator I found.
This tool has helped me adjust my budget several times after moving or changing jobs. I appreciate that it breaks down each category and summarizes the taxes. You can even add retirement account contributions, which is a great perk for pre-tax investments.
To get a better idea of how the tool works, I threw together a brief example. The average starting salary for a college graduate last year was $50,004 [1]. So for an individual living in Indiana, they would have a take-home pay of around $39,400.
An alternative for figuring net income is to use a paystub. It will include gross earnings and any taxes withheld. But if you just moved, started a new job, or you are looking at higher-paying jobs, then an income tax calculator will come in handy.
Step 2. Summarize Necessities
The next step to creating a budget was to put together a list of my monthly needs. These are things like rent, groceries, and transportation. Keep in mind that they are “must-haves”, and shouldn’t include the cable bill or dining out.
Going back to the example in Step 1, let’s say this individual is single with no kids. The table below shows what their household bills would look like based on the average expenses in the Indianapolis area.
- Car [2,3] $215
- Gas [4] $60
- Grocery [5] $215
- Health Care [6] $260
- Rent [7] $800
- Utilities [8] $100
- Student Loan [9] $280
- Basic Phone [10] $15
Total $1,945
An easy tool for organizing expenses is Microsoft Excel. I use it for just about everything. If you don’t have a license for the program, then Google Sheets is a free option.
Once my necessities were summarized, I subtracted them from my net income to determine how much remains for the budget.
Step 3. Set Savings Goals
Before you start purchasing AirPods and trips to Ibiza, take a minute to set up your savings. The best way I got started was by using a bank and brokerage firm to schedule recurring deposits. The funds automatically withdraw from my checking account each month. By doing this, the payments end up feeling like a bill, something I’m are obligated to pay, instead of an afterthought chore.
Any financial institution that allows automatic transactions will do the trick. However, I suggest Fidelity Investments or Discover Banking. I have accounts with both of them. Fidelity offers great learning resources, and Discover has competitive interest rates and excellent customer service.
Budget Engineer Tip: Using a savings account at a separate bank or credit union can help reduce the temptation of dipping into your nest egg.
How much should you save?
The gold standard for saving is the 50/30/20 rule. This benchmark recommends that your net income should be split into three buckets: 50% needs, 30% wants, and 20% savings.
I use this as a guideline for my budget. And I supplement my savings rate with extra income streams and side hustles. Last year, I added an additional $8,873 to my cash flow.
Some people use a variation of 70/20/10. Everyone’s financial situation and goals are different. The important thing is just to start saving.
Step 4. Manage Spending
At this point, the budget has a solid foundation. But it can be easily undone if spending isn’t kept in check.
Let’s take a look at the Hoosier example one last time. We already calculated that their take-home pay was $3,286. If they save 20%, then the final budget would be:
Needs $1,945 59% Savings $657 20% Wants $684 21%
The $684 is a hard number because going over it will break the budget. If that happens, either savings will suffer or debt will form.
Need help trimming expenses from the budget? Check out how I saved $3,465 on my expenses in 2019!
This budget step isn’t all doom and gloom. The money can be put towards the fun stuff like Netflix, shopping, restaurants, or several hundred candles. And it should be! Even though the “wants” bucket is saved for the end, it doesn’t mean it should be neglected altogether. I can get caught up in saving, and at times this is something I forget.
Step 5. Track Progress
All plans sound great on paper, but most will fail if they don’t have a way to sustain them. There are lots of tools available for maintaining a budget, with Mint and Personal Capital being the frontrunners. Both options are powerful programs that are free to use.
I have not tried Mint so I cannot vouch for it. But from what I’ve read it seems like the better choice between the two for strictly budgeting. Personal Capital, on the other hand, is geared more towards investment management. I’ve used it for about a year, and it’s been a great experience.
Personal Capital links all of your financial accounts and credit cards into one dashboard. From there you can set a budget goal and track your progress. They will monitor cash flow and send notifications based on your spending habits. It helps me get back on track when my spending creeps up.
Remember when I said that creating a budget would be simple? Unfortunately, I never said easy. Running a marathon is simple, but it isn’t easy. The same goes for a budget. You have to be in it for the long haul.
You are your best tool for creating and maintaining your budget. Create one today if you haven’t already. Start small, build momentum, and make adjustments along the way. You won’t regret it down the road.
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