How To Budget In 7 Easy Steps
It’s an oh-so-simple word with complicated connotations…. Budget. The word even sounds kind of inconspicuous, bland, uninteresting. And that’s because as a society we celebrate the spenders!
Social media highlights the spending habits of the rich and beautiful, not the frugal, and our governments secretly want us to spend to keep the oils of our consumer society well greased, business booming, politicians rich and consumers happy. In other words they don’t want us to learn how to budget.
Just look at our language: we use words like ‘frugal’, ‘miserly’, ‘stingy’ and ‘tight’ to describe the behaviour of controlling money, whilst those who spend are described as ‘big spender’, ‘high roller’, ‘generous’ or as having ‘deep pockets’.
We are unconsciously biased towards behaviour that encourages us to spend. But if you want to be rich you must relearn everything you know to control your money, the importance of rebalancing your mindset and the power of the oh-so-simple…. budget.
If You Want To Be Wealthy, You Need To Learn How To Budget
Yep you heard. Sounds strange doesn’t it? After all if you have loads of wealth, what’s the point of budgeting?
Actually budgeting is the bedrock of wealth. And there are few rich people who would be able to hold onto their wealth without actively budgeting. After all, if you don’t know how to control your expenses or record what you spend then it’s very likely that any wealth you have built will quickly disappear.
Budgeting is essential to understanding the income and outcome of your financial life.
It helps you to control your expenses and consistently plan so that, over time, you can reign in any unnecessary expenses to produce a wealth surplus in your life.
Budgeting has a bad rep and that’s because we associate it with a scrooge-like process of going through receipts, managing debt and the stress that we perhaps saw our parents endure as a result of managing ever spiralling expenses.
But it doesn’t have to be that way. When you learn how to budget properly, by using a fantastic template, (more on that below) then you will figure out how to make budget easy, accessible and fun.
There’s nothing better than being in control of your financial life and, in this post, you’ll learn how to build the foundations for a solid budget, create a better budget that will actually work for you and take all the stress out of budgeting month to month, or year to year, so you can enjoy life to the full.
So let’s get to it!
Building Your Budgeting Foundations
I talk a lot about mindset on this blog and ‘fraid I’m going to do it again here! Why? Because mindset is so important when it comes to managing money and building solid financial foundations.
Let me explain: I have a good friend who doesn’t budget at all. As a creative designer, they earn a significant amount of money, sometimes securing contracts that can pay up to $150,000 per annum (they work freelance, so that is the equivalent yearly salary).
And yet they always find themselves in a precarious financial situation. Why? Because their money mindset is a mess. They will spend $900 on a pair of designer trainers pretty much on impulse (yup, trainers!) without having enough money to pay rent.
I just can’t, even.
But… I’m not here to judge. Everyone has different priorities and unless that person is an immediate family then it’s not really up to us, or me in this case, to try and change their mindset. As you’re here reading this, you’ve already made that decision. The important thing is to understand that it doesn’t really matter how much you earn if you don’t know how to control your spending. In this scenario, your wealth, no matter how big, is always at risk.
It’s essential to unlearn what society, and advertising companies, brainwash us into believing, which is to spend, spend, spend. We need to reassert our priorities which should be to ensure we can afford the type of life we want and not the type of life that friends, advertisers or colleagues think is important.
If owning a Rolex and all designer brand clothing is important to you then, sure, identify it as a goal but just make sure you can afford it first, rather than buying it now and paying for it later.
It really is up to you to decide what your priorities are and what you’d like to do with the surplus wealth you get from consistently budgeting. The important distinction is to make sure it’s surplus wealth and not fake, pretend, credit card wealth.
There is no right or wrong when it comes to budgeting; you simply have to make sure that your mindset is one that is geared up to the priorities which are important to you and not one that seeks approval from others.
And you must be honest with the lifestyle and priorities that you really want. Don’t live like the Khardashians simply because you follow them on social media. In fact, if you’re linked into a lot of social media accounts from high-spending influencers it might be a good idea to have a spring clean altogether. Or maybe even delete the apps from your phone for a while.
If you can build the confidence to believe in your own dream without relying on spending unrealistic levels of money to achieve your dreams then you are halfway there.
People think that budgeting is as simple as spending less than you earn. But it’s much more. It’s also about resetting your priorities, quantifying your existing lifestyle, the amount it costs and the amount of money you earn and then balancing the two.
Once you go through this process you’ll feel much more confident about the person who emerges on the other side. You’ll be in control, the master of your own destiny and that is a feeling that no one can take away.
Why Do I Need To Write It All Down? Can’t I Just Save Money!?
Yep, you can just save money. But we’re human right? (that’s a rhetorical question).
What I mean by that is even with the best intentions we forget, we make excuses, we persuade ourselves that we’ll start again with even more consistency tomorrow.
Let’s be honest, the best way to record your expenses and start creating your budget is to, well start creating your budget!
Sign up to my budget templates above. Once you sign up you’ll be emailed 2 budget templates, a monthly version or an annual version, depending on your preference, AND a PDF of the monthly version if you prefer to print it out and write it all down.
Before you start completing your budget template, make sure you read the rest of this post you know all of the factors you need to take into account when setting up your first budget.
Very few people can make a plan in their head and stick to it consistently. For the rest of us, we need a written down structure; a plan that we can look at, in black and white, something that lays everything out and can be referred back to time and time again.
When we think about budgets traditionally it probably goes something like this:
The problem with this approach is that it’s a simple mathematical exercise. If we don’t deal with the reason why we need to budget in the first place we will be stuck in a forever-loop, like Groundhog Day, on an endless cycle where we come back to the same problem we began with.
Identifying your goals and changing your mindset helps to break bad spending habits and reset the balance of priorities.
There are a ton of different budgeting approaches online such as:
Pay Yourself First Budget or Reverse Budgeting is a budget strategy that prioritises using your income towards a saving goal instead of focusing on your expenses. You “pay yourself first” so long as it is not at the expense of your essential costs like housing.
The 50/30/20 Budget recommends that you spend exactly 50% of your income on needs, 30% on things you want and 20% on savings.
Budgeting with Intention is focussed on being intentional about where your money goes.
Personally I believe that the best approach mixes the very best aspects of all these different approaches to budgeting into a sensible, logical strategy that maximises results in the shortest time possible.
The overall aim is to transition to a more organised, more careful and more mindful way of living that enables us to take ownership of our money.
That’s why I’ve identified 7 KEY STEPS below that cover all aspects of creating a budget.
Let’s Get Started
How to Budget Like a Boss in 7 Easy Steps!
Step 1: Identify Your Target Goals and What They Cost
This is obviously the first step because the point of putting in place a budget is usually to work out exactly how much you need each month to afford your most important goals.
It’s your priorities that you hold close; the long-term travel adventure that you’ve been wanting to go on for years, or the dream home that you’ve always wanted to buy.
Identifying your goals is the most important step because it allows us to make ‘real’ the things you are aiming for.
In the top section of my budget template, there’s space to outline 4 goals. I recommend starting with no more than four because a) we’re trying to save money not spend money we haven’t already saved yet and b) you’ve only got so many hours in the day/week/month/year and if you set out more than 4 goals it’s going to be difficult for you to keep up.
When you’re not working or building out a passive source of income you’ll be wanting to spend your downtime relaxing and enjoying the fruits of your budget-work.
Identify each goal in the spreadsheet and your total saving target required in order to realise that goal (if you’re saving for a deposit on a house for example). In the next column identify the monthly amount that you can contribute.
Once you’ve figured out how much you can pay into your goal each month divide the total amount by the monthly amount and that figure will give you the number of months it will take to realise that saving goal. Note: if it’s running into thousands each month you might want to reassess your goal: this leads us onto the next goal step…
Step 2: Take a Long, Hard, Good Look at Your Lifestyle
This is the uncomfortable bit where we need to go and take a long hard look in the mirror and ask yourself “Do you feel lucky punk? Do you?” Then ask yourself if you can afford the lifestyle that you live.
Seriously though, it’s a hard thing to do because it’s easy to become accustomed to a certain way of living. But if that lifestyle depends on credit then it’s time to shake things up.
This goes to the core of how we view ourselves in the world. The way we spend money and the things we choose to buy can often be done with the intent to present an outward appearance of success.
And when we force ourselves to reassess that, and our real, spending priorities, then it can be difficult to make the necessary adjustments to your lifestyle.
But remember what’s important; the success you achieve is measured by what you do, not how you look. So switch off Instagram and stop comparing yourself to others. Figure out what your priorities are and don’t be afraid to shape your spending and commitments in order to focus on what really matters to you.
If you’re struggling with debt, starting a budget is essential to regaining control of your finances. It’s also important to tackle any debt head-on and this should be a priority. But don’t worry, you’re not alone. Check out my post about what to do when your heavily in debt:
Step 3: Figure Out Your Spending and Commitments
Figuring out your expenses and commitments is the most time-intensive part of your budgeting journey. Commitments are the fixed bills that you pay each month; your utilities, mortgage payments or other fixed fees.
Your expenses are slightly more variable. And tracking expenses can be a little more time-consuming because it’s helpful to do it over the period of a week or month to get an accurate picture of what you might be spending day-to-day.
There is absolutely no point in trying to save money if the expenses from your current lifestyle will drown out any savings you manage to accumulate.
Part of the process of figuring out your outgoings includes tracking all of your expenses. I believe the simplest and most effective way to achieve this is to ask for a receipt for every purchase you make.
There are two reasons why this method is so effective.
1. It provides a hard copy paper record of the transaction, no matter how small, that has debited your account
2. it instils in you a greater awareness of how much you actually spend on the day to day expenses.
Those Starbuck Lattes really do add up! (In my case it’s hot chocolate.. hmmm).
But collecting your expenses by way of receipt is the most foolproof way of creating a tangible record that will keep you on track.
Next, you will take every receipt you collect through-out the week and clip them together at home. At the end of each week, or even each month if you prefer, you will take your bundle of receipts and do the following:
If you couldn’t get a receipt for a particular transaction then use your bank statement to cross-check the amount and category.
Tracking expenses is a snapshot of your current lifestyle – it’s almost like a lifestyle autopsy because it will show where your finances are bleeding out. Ok, no more grim analogies.
Either way, it can be shocking, surprising or weirdly reassuring. If might feel like a bit of a faff but you will find it interesting, and maybe a little surprising, to see where your money goes. The point of the exercise is to work out if you are living with your means and whether or not you need to readjust your lifestyle or readjust your means.
What the hell do I mean by means? It’s your doh, your boodle, your cheese, quid, cabbage, milk, dosh, shillings, moolah, paper, readies, loot…. Your income.
Step 4: Figure Out Your Income
Figuring out your income is not as simple as it sounds.
Ok, it might be for some people. If you support yourself with a fixed salary and receive a payslip each month then there’s a clear figure in black and white that tells you how much you earned.
But if you receive income from real estate, freelance work, investments, dividends, other sources of passive income or from any kind of side hustle then things become a bit more complicated.
The key to figuring out your income, if it comes from multiple sources, is to ensure you make all the right deductions.
This varies depending on where you live, but you want to make sure you account for any taxes, charges or other deductions before you input your total income into your budget template. Got it.
So now that you have worked out why you want to save money, what you current expenses and commitments are AND what your income is you should have a pretty good idea of your financial situation in relation to your current spend.
When I first went through this exercise I was really amazed at how much money I spent on… just useless stuff that I didn’t really need! Mostly eating out, which wasn’t great for my health or my finances. A ton of stuff that I didn’t really need.
But if you’ve done this analysis and your outgoings are way in excess of your income then you only have two realistic options (aside from burying your head in the sand – and that’s not a great look) and those options bring us to Step 5.
Step 5: Decrease Your Spending OR Increase Your Income
Logic suggests that the quickest way to create a wealth surplus each month is to cut back on your expenses.
And that’s absolutely a critical strategy to use if your lifestyle is on the more extravagant side.
If you’re pretty frugal, to begin with (and you’ll know if you really are once you’ve completed Step 3) then you might want to look at things from the other side of the coin.
Let me explain but first we need to talk about economics…. (hear me out)
Economics is focussed on managing what exists. It’s why there aren’t too many billionaire economists and the reason for that is because economists tend to only think about what they have to manage and not what they can create.
In order to create wealth and increase your income, you need to imagine what doesn’t exist (i.e. wealth that currently doesn’t exist in your life).
Having strong budgeting and accountancy-type skills is important, don’t get me wrong – one doesn’t cancel out the other.
BUT if you want to think about the options available for increasing your income then you have to believe the world is a place of abundance, not scarcity, and the opportunities for you to create unbelievable wealth exist all around.
Still don’t believe me? Check out the following list of 47 Passive Income sources which will provide the inspiration you need to see opportunity exists when you look at the world with a different perspective:
If you can learn how to to consistently create wealth than the gap between your income and expenses expands and this will help you get to the target goals you outlined in Step 1 faster.
Step 6: Live by Your Day to Day Budget
I know what you’re thinking…. ‘Well, Duh!’
But trust me, it’s easier said than done.
The big problem with simply living by your day to day budget is that it’s not that straightforward because unless you’ve already been living like that (and if you had you probably wouldn’t be budgeting right now) then there is inevitably going to be a period of adjustment.
The more you learn about managing your money the more you realise that wealth, controlling finances and budgeting is mostly about your mindset.
There are some simple characteristics that define whether you have a wealthy or poor mindset. Don’t judge yourself harshly – I personally believe that we are capable of adopting all of these characteristics.
But once we recognise certain behaviours we can begin to control them and start living by a day to day budget that can revolutionise your finances.
It might help to look at some of the characteristics of those who excel at budgets, those who never face the anxieties of unplanned for expenses – the frugal people! From frugal rock. (sorry, couldn’t resist)
Being frugal is about managing your money mindfully. It’s not about being cheap and it’s not about missing out, it’s about a keen sense of purpose with regards to what’s important in life.
With that in mind what are some of the key characteristics of frugal people that we could take on for ourselves. Frugal people:
Developing an additional source of income is not just a good idea, it’s actually the main focus of this blog!
I created an in-depth guide of 47 different sources of passive income that anybody can set up. I’ve tried most of the things in this list but if you really want to know the best way to make money then I’d have to say it’s setting up a money-making blog.
All you need is a laptop and an internet connection which makes blogging one of the most flexible businesses you can create. It’s also extremely low-cost.
Taking out hosting with GreenGeeks costs just $2.95 per month, so if you want to know how to get started with your own blog today click this link or pin my indepth guide below for later.
Step 7: Stick to Your Long-term Plan to Achieve Your Goals
The most important part of your budgeting journey can be summed up in one word: consistency.
Just like the perfect dough, your consistency needs to be thorough in order to raise the perfect budget-loaf.
Remember everything outlined above is designed to help you change your mindset; it includes some of the strategies I used to get myself out of debt as well as the top factors, as researched and investigated, that have helped other finance bloggers to create better budgets.
Budgeting isn’t about sticking rigidly to a system like this for the rest of your life, rather it’s about relearning the way you handle money, track expenses and plan your future.
Once you have improved your finances by learning how to budget you will be on course to becoming financially free.
The habits you learn from budgeting consistently will last for the rest of your life. Long after you stop writing down every expense you will hold onto the financial control and management that budgeting helped to instil in you.
How Budgeting Can Save Your Financial Life
When I was severely in debt following this budget system allowed me to pull myself out of debt and regain control of my finances and my life. It took about a year.
I no longer write out a fresh budget spreadsheet each month but the skills I learnt in using budgets have transferred over into other projects, for example, planning real estate investments and renovations and I still track my expenses and always ask for a receipt!
When you learn how to budget you not only change your mindset and learn how to track expenses; you change your relationship with money, you learn to analyse your financial life and you plan for the future.
You gain a better understanding of where your money goes and how to set your financial priorities and be more mindful about the things you do spend money on.
Most of all you will learn new skills that will last a lifetime.
▶︎ hey, I’m Tom
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