I am calling this a how to guide to creating a frugal budget, but I suppose it could be used to create an extravagant budget as well. What it really teaches is how to assess your ability to spend less than you earn, reduce you debt (if you have any), and start saving for retirement and the future. Maybe you simply want to call it the common sense budget.
There is nothing difficult in the steps required to create this budget and it shouldn’t take more than a couple hours of your time. It is certainly a meaningful and useful way to spend a few hours on a Saturday or Sunday.
Feel free to do this in any way you like. If there’s a budgeting program you are familiar with, go ahead and use that. I prefer to do mine in a simple Excel spreadsheet.
You could even do it the old fashioned way with paper and pencil. You will also need a calculator, copies of all your recent bills (three months worth should be sufficient), and a copy of your latest paystub (several months back if your pay varies from month to month).
Ready? Let’s get started!
- Figure out your monthly expenses. – Using your bills and checking account statement figure out how much you spend each month on various categories such as mortgage/rent, auto expenses (loan payments, insurance, gas), entertainment, utilities, food, etc. Also include any minimum payments on credit cards and personal loans.
- Figure your monthly income. – Total up your monthly earnings from your job, any investments, side hustles, etc.
- Subtract your expenses from your earnings. – If you are fortunate (or already financially stable), your earnings will be higher than your expenses and this will be a positive number. Good for you! If you get a negative number go to the next step. Even if you get a positive number go to the next step as there’s no such thing as saving too much money. If you need to save money, consider eliminating or reducing expenses. One way to do this is by switching to a lower cost insurance provider such as comprehensive insurance by Youi.
- Recalibrate your budget. – If you’ve come up with a negative number, go back through your budget and figure out where you can cut expenses to make the budget balanced at a minimum. If you have ways to increase your income immediately you can also adjust your income accordingly.
- Recalibrate your budget again to account for debt reduction. – If you are already debt free you can skip this step, but I recommend doing it anyway to try and increase your monthly savings. Those of you with debt should try to be aggressive here. You already have minimum payments built into the budget, which is a good start. However, just making minimum payments means it will likely take you decades to get off the debt treadmill. Go back through your expenses and cut aggressively anything that is not necessary and will help you get out of debt as quickly as possible.
- Rework your budget a third time to build in savings. – Depending on your current debt and savings levels this could vary widely. If you are just beginning to fix your personal finances this could be something as simple as creating an emergency fund. If you have a high debt burden this could be a very small number, but you need to start saving something. In too many cases, people neglect to save for emergencies and later find themselves going back into debt when an emergency occurs.This is disheartening to say the least and can even cause you to give up on trying to attain financial freedom. Debt reduction needs to remain your first priority, but you should try to put at least 2-3% of your monthly income into some type of savings.
- Start living your budget. – A budget is only as good as your ability to stick with it. Start living within your budgeted expenses and see how it feels.It may seem like you are suffering at first, but in almost every case you will get used to the decreased expenses. Even those who live a life of extreme frugality often feel as if their life is rich and rewarding.
- Reassess your budget. – Now that you’ve spent some time living your budget take some time to reassess it. At the end of each month compare your budget with your actual expenses and income. Is reality matching your budget? It should be and if it isn’t you need to either try harder to stick with your budgeted expenses or you need to adjust your budget to reflect your actual expenses.
- Make your budget a habit. – Living with a frugal budget, or any budget for that matter, is a never ending thing. Even once you pay off all your debts,you need to continue using your budget to ensure that your savings remain on track. Continue assessing your budget every month to keep yourself from slipping back into the overspending habit. Make adjustments when necessary to provide savings for one time purchases such as vacations, household appliances and electronics, or anything else you might have been tempted to go into debt for in the past.
- Enjoy your new found freedom. – While the idea of a budget may sound as if you are chaining yourself, nothing could be further from the truth. You are freeing yourself from debt, freeing yourself from impulsive purchases, and freeing yourself from the consumer mindset that gets so many into financial woe. Enjoy your freedom and strive to expand it through investments and savings.
There you have a simple method for creating a simple budget. Whether you need a frugal budget to pay down debt and save more, or a more luxurious budget that allows for expensive habits, this simple guide has you covered. At its heart a budget is simply meant to keep you mindful of your spending and ensuring that you don’t spend more than you make. In that regard, always remain truthful about your spending when creating a budget, always budget some money for fun and frivolity, and never be afraid to modify your budget if it isn’t working for you.
What about you good reader…do you have any other helpful budgeting tips you would like to share below?