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Learning how to create a personal budget isn’t the funnest thing in the world…
…but if you can do this, you will start to see, predict and have better control over your life and all of the amazing things you want to do instead of just being like a leaf blowing in the wind, at the mercy of where the wind blows you.
The opposite of this is being like the sail boat or glider plane that use the wind and leverage it to choose where to go to… Pretty exciting, right?
So the question is, “do you want to be the leaf or the plane?”
If you’re ready to be the plane, let’s break this down even further into three simple steps to help you to start taking control of your finances and empowering you to make your income go much further so you could enjoy all the things you want in life.
Sound good?
Let’s go!
Step 1: Money in Money Out
To learn how to make a budget, we have to start with the basics. I’m going to kick things off by diving into cash flow, which, in simple terms, is about what money comes in and what goes out. It might sound basic, but this is your financial pulse. Knowing your income sources is like knowing your heartbeat. It’s not just about your main paycheck. Consider other income streams like side gigs, passive income, or even money from a garage sale.
Now what about expenses? They’re split into two camps: fixed and variable. Fixed are the recurring bills like rent, while variable expenses – think groceries or entertainment – can fluctuate. So why keep an eagle eye on them? Well, because this is where you can play with numbers to save more.
Tracking your spending isn’t exciting, but it’s a game-changer. Every coffee or online purchase adds up. I recommend tools like financial software, a good old spreadsheet, a note app or even a pocket sized pen and pad – whatever you’re more likely to use consistently.
And as you’re getting the hang of this, you’re also laying the groundwork for the next part: setting smart financial objectives. Once you know your cash flow like the back of your hand, steering it in the right direction becomes a whole lot easier.
Your Action Item: Make a list of everything that comes in (all your incomes) and everything that goes out (your fixed and variable expenses).
Step 2: Setting Smart Financial Objectives
Let’s talk about goal-setting, but not just any goals – SMART ones. I’m sure you’ve heard of them before, but in case you haven’t, that’s Specific, Measurable, Achievable, Relevant, and Time-bound. What makes this framework so powerful for your personal budget is its focus on clarity and trackability. For instance, just saying you want to save money isn’t enough. You need to specify a realistic amount, specifically how much you’re going to save, by when, and what for.
A crucial aspect of any successful budget is prioritizing your financial goals. It’s likely that you have multiple things you want to achieve with your money, so determining which goals are the most important to you can make a big difference. This might mean prioritizing an emergency fund before saving for a vacation. Choose something that resonates with you and contributes to your financial stability is critical.
It’s also important to categorize your objectives into short-term and long-term buckets. Short-term goals might include paying off credit card debt within a year, while long-term goals could be retirement savings or paying off a mortgage. Devising a mix of both helps in maintaining motivation and perspective, as you’ll see incremental wins while also keeping an eye on the future. Pure gold!
Remember, this isn’t just about numbers; it’s also about your life. Aligning your financial goals with personal values and what matters most to you – whether that’s traveling, homeownership, or education – can be incredibly motivating. It’s about creating a budget that supports your way of life, not one that constrains it.
Your Action Item: Make two lists for your goals, a short-term list (maybe one year [even 18-months] or less) and a long term list (two years, plus).
Then write SMART vertically for each goal, so you can fill in each part of the SMART goal with details that are Specific, Measurable, Achievable, Relevant, and Time-bound.
Step 3: Crafting Your Personal Budget Blueprint
I’m going to walk you through the nitty-gritty of forming a budget that’s not just a list of numbers, but a blueprint for your financial freedom. Don’t worry too much about getting it perfect from the get-go; you can always adjust your approach down the road.
Choosing the right budgeting method is important, and it has to resonate with you. You might have heard of the envelope system, the 50/30/20 rule, or zero-based budgeting. These all have their merits, but choose something that fits your routine and financial goals.
You’re going to find out about separating your expenses into categories. It’s a lot like doing laundry; you want to sort your funds like you would your whites, colors, and delicates. Allocate your income so each dollar has its ‘compartment’ – necessities, savings, debts, and wants.
Irregular expenses can often trip you up. Think vet visits, car repairs, or gifts. We’ll tackle these by setting aside a category in your budget for those unexpected costs. This isn’t just about monthly spending; it’s also about preparing for the occasional curveballs.
Lastly, as part of this budget blueprint, it’s crucial to reflect the costs that contribute to your bigger financial picture so you have a realistic goal to save for. Whether it’s for an emergency fund, a down payment, or that dream vacation, your budget should earmark funds that bring you closer to these goals, considering all the possible expenses that your goal will require.
Your Action Item: After completing action items one and two, you now have a clear understanding of your income situation, your expenses and your goals. On this step, you will then create the division of your income so it goes into the right ‘buckets’ and you don’t accidentally spend that ‘goal’ money on frivolous expenses, sabotaging the reaching of your goals and life… Part of this may include having different bank accounts with different banks or simply different savings accounts within the same bank.
Create that split, make those accounts, and start funneling your income every month into the appropriate buckets.
Bonus Step: Monitoring and Adjusting Your Budget Regularly 😉
I’m going to paint a picture for you. Imagine your budget isn’t set in stone, but it’s more like a living document that ebbs and flows as your life does. That’s the truth of it – no static budget can accommodate the dynamic nature of our daily financial lives.
You’re going to find out about why it’s crucial to review your budget on a regular basis. This isn’t just about catching errors or overspending, it’s also about making sure your budget reflects your current financial reality.
I’m here to help you with strategies on staying within your spending limits. This might involve cutting back in one area to splurge in another, or identifying new ways to save money. You can always adjust your approach down the road, which is the beauty of personal budgeting.
So, what if your financial situation changes? You might get a raise, have a new addition to the family, or face unexpected expenses. Your budget needs to adapt to these changes. Flexibility is key here. If you’ve budgeted for a gym membership but haven’t gone in months, it might be time to reallocate those funds.
In my opinion, the best tools are the ones that make your life easier. Use budgeting apps, online banking, and alerts to keep you informed about where your finances stand. These can help automate some of the budget monitoring and give you real-time feedback on your spending habits.
And remember, your first attempt doesn’t need to be your last. Budgets evolve just as we do. Just don’t focus too much on perfection. Choose something that resonates with you, whether that’s a weekly budget meeting with yourself or setting monthly alerts to check your spending. There’s a lot of opportunity in making adjustments – that’s how you’ll keep your budget workable and stay on the path to financial stability.
This last bonus step is critical and will, in time, feel better and better since you will begin reaching small, then medium and finally large milestones! This is the glue that holds everything together. As you witness the wins you achieve, you will feel proud and REALLY see where you are at in your life and life’s goals.
I am excited for you and encourage you to post a comment on how this article has helped you to create a budget that works for you, or even add some additional ideas that have helped you that I may have missed!