Building your Financial Life: Budgeting for Beginners
OppLoans Monthly Budget Guide
The use of money is all the advantage there is in having it. – Benjamin Franklin
Maybe you’ve read one too many budget manifestos that promise you can save $1,200 each year by making coffee at home—but you drive right by a Starbucks on your way to work, and a morning latte makes your 45-minute commute just a little more bearable. Or you’re a happily renting Millennial who doesn’t buy in to the notion that the reason you don’t own a home is that you occasionally order avocado toast.
In spite of the sometimes complex emotions surrounding our finances, money is neither good nor bad. It is simply a means for taking care of our needs and fulfilling some of our wants. A comprehensive budget that captures the reality of your life and your finances can provide a roadmap to putting your money to work for you—and ultimately, to using it as a tool to help achieve your goals.
The first brick in building your financial life is taking time to establish an accurate view of your finances. Basing your budget on actual data, rather than a best guess, will help you create a budget that you can actually live with. Plan to dedicate a block of time to truly dig in to your income and expenses.
To start, gather all of the financial information you have available for the last three months: bank statements, credit card bills, pay stubs (if your pay fluctuates), and records of any other regular source of income such as side jobs or child support payments.
Using the categories in the budget template as a guide, add or delete any budget items that make sense to you, and begin sorting your expenses into these buckets. No kids or family expenses? Delete that section entirely. City dweller who takes public transit? Take a close look at transportation. Organize your master budget in a way that reflects how you actually spend your money.
Step 1: Calculate your total income.
- What is your total take-home pay each month?
- If there is a second income earner in your household, such as a spouse/partner or other adult, what is their total take-home pay each month?
- How much income do you earn from side jobs, such as babysitting, freelance work, driving for a rideshare service, etc.? If this fluctuates from month to month, look at your last three months of earnings to provide an estimate.
- Do you have any other recurring sources of income, such as child support?
Step 2: Categorize your monthly spending.
Identify your recurring expenses in each of these categories:
- Housing – Expenses such as rent or mortgage payments, property taxes, and other costs incurred in running a household.
- Children and Family – In 2018, the average cost of raising a child from birth to age 18 was $233,610. Are you spending money on daycare, kids’ sports, or just buying diapers? So. Many. Diapers. Capture family-related expenses here.
- Transportation – Whether you take public transit or have a monthly car payment, think beyond your monthly transit pass or car payment. Make sure to include ongoing expenses like taxis or rideshare services, or your annual car registration fee.
- Entertainment – A night out with friends or a trip to the waterpark with your family, much of your discretionary spending will fall into this category.
- Medical – From health insurance premiums (if not deducted from your paycheck) to prescriptions and co-pays. In addition, think ahead to any dental and vision expenses you anticipate in the coming year.
- Food – How do you spend your money on food? Consider what level of visibility you need in classifying these costs–should you have a separate category for your coffee runs or for workweek lunches?
- Pets – Don’t forget to list the expenses associated with your furry friend.
- Personal Care – Everything from haircuts to your budget for gift giving.
- Debt – One way to approach debt in your monthly budget is to include only minimum payments as recurring expenses while applying any extra money left at the end of the month to pay down debt. Another option is to set a goal for how much you want to pay towards debt each month.
- Savings – How much are you currently saving, and what are you saving for?
- Charitable Giving – If altruism is a priority for you, be sure to designate a spot for it in your monthly budget.
Many banks and credit card companies enable you to download your monthly statement in a convenient spreadsheet. While this can be helpful for tracking expenses month to month, as you establish your master budget, be sure to manually review each item and make sure it is assigned to the correct category.
Step 3: Plan for emergencies–and all that stuff you forgot.
Unexpected expenses are often stressful–perhaps your car suddenly breaks down, or your pet takes a trip to the emergency vet. The last thing you want to think about in the midst of dealing with a crisis is how you are going to pay for everything. Or worse: You could end up needing a high-cost payday loan or cash advance to cover your bill.
That’s why you need an easily accessible emergency fund that can provide significant peace of mind and financial stability during times of crisis.
If your emergency fund is currently unfunded, start small. Save $100, then $500, then a month’s worth of expenses, until you have 3-6 months of income stashed away.
Additionally, don’t let predictable expenses become emergency expenses. When you create your budget, allocate money for expenses that only come up a few times a year, such as your car registration or purchasing your yearly supply of contact lenses.
Step 4: Consider your financial goals.
Once you have established your budget categories and organized your expenses, it’s time to step back and take a big picture view.
Think about your overall financial goals. Are you looking ahead to retirement? Do you have financial goals for your children, such as sending them to private school or helping them pay college tuition? Are you saving to buy a house, move into your first apartment, or take a bucket list vacation? And critically, does your current spending and saving reflect these priorities?
Write down one to three savings goals and include them in your budget document–even if you currently have nothing saved towards them. Visibility is key.
Step 5: Adjust your discretionary spending.
While you will always need a place to live and food to eat, many of the categories in your budget can be adjusted to better reflect your financial targets. When you reviewed your recent spending, were there any surprises? Where did you spend more money than expected? Where does it make sense to cut back?
Tracking your expenses
Now that you have built a master budget, you will need to maintain it on an ongoing basis. One simple way is with an online tool like Mint or You Need a Budget which connects to your bank account and credit cards and automatically import your expenses. The major benefit to going digital is that it minimizes the time spent on manual tasks. Additionally, automated tools can be helpful for couples and families who budget together, as they offer increased visibility.
To successfully use an automated tool, be sure to log in periodically to review your spending and align transactions to the budget categories you established in your master budget.
Some people find it helpful to input expenses manually. While this inevitably takes longer, revisiting each purchase can be helpful in gaining a true understanding of your spending. However, in addition, the risk of human error making the process time-consuming means you may be less likely to sit down and do it.
With either method, keep in mind a few important things. Remember to capture any cash outlays, noting how it was spent, so you can properly categorize it. For shopping trips to big box stores like Target and Walmart, be sure to save your receipts. If you spent $25 on groceries and $30 on household goods, you will want to allocate that spending to the proper categories.
After one month of tracking your spending, revisit your master budget. Where did your spending exceed your budget? Think about whether this is an area where you need to reduce spending, or simply adjust your budget to more accurately reflect your expenses. Where did you spend less than what you had allocated? Where did this money go instead? Were you able to gain any traction towards your long-term goals?
A budget is not like your Instant Pot–you can’t “set it and forget it.” It is essential to check in regularly. As you live with your budget, over time you may discover that your initial estimates need adjusting. And of course, as your life changes, your financial priorities will evolve as well.
Once you’ve mastered the basics of a budget, you’ll be ready to level up. In future OppLoans budget guides, we will take a more detailed look at critical topics such as balancing a budget when you and your partner have different financial styles, and how to find room in your budget to tackle some of your long-term money goals.