Basic Budgeting: How to Plan for Your Expenses
Budgeting as a concept means creating a plan for how much money we are going to spend over some set amount of time, say a month. This allows us to see at a glance how much money we may be bringing in, how much money we are spending, and how much we are saving. If our monthly budget covers costs larger than our monthly after-tax income, then our spending is not sustainable and eventually we will run out of money. If the opposite is true and our budget is smaller than our income, then the surplus can be used to create an emergency fund, begin saving for retirement, or put towards any number of investments.
How to Make a Budget
Knowing how to budget money is an invaluable skill, and one that will help get your finances organized and get you onto the road to building generational wealth. There are a great deal of budgeting worksheets available, including Fun Fresh Finance's own budget template, which you can get free access to through our welcome email. I would recommend using this as a starting point.Budgeting is all about tracking and quantifying expenses. Our sample monthly budget template contains several common expenses such as rent, groceries, utilities, and phone bill. Depending on whether or not you live in a city or have accessible public transit near you, you may need to include expenses related to owning a car as well. We have over-included these costs in our budget worksheet, meaning after you open it up you should remove any individual rows containing expenses which you do not have to pay. For instance, when California's shelter in place order first started, I quit using my car and canceled my car insurance, freeing up roughly $60 per month. I am also very happy to say my lovely parents have not yet kicked me off their cell phone plan, so that is another expense which I do not include in my budget.
If you have an especially strong familial financial support network, there may be multiple expenses you are able to remove from your budget plan. Moving back in with your parents is not at the top of anyone's to-do list, but if you are lucky enough to have family with space for you, this is a way to eliminate or greatly reduce what is most young people's largest expense: rent. For instance, I am very happy to be in a situation splitting $800 rent with my partner in the heart of San Francisco’s East Bay, a notoriously expensive housing market. This is only possible because we live in a converted garage detached from my partner's parents' house. It is not the most independent living situation, but it is by far the cheapest.
I typically use spreadsheets for any kind of budgeting I need to do, because they provide all kinds of helpful functionality like summing a list. For the purposes of this blog post, I have included a sample personal budget below in table form.
| Item | Price | Total Expenses | After Tax Income |
|---|---|---|---|
| Groceries | $400 | $3000 | $3000 |
| Rent | $800 | ||
| Gas/Electric | $80 | ||
| Water/Sewer | $80 | ||
| Internet | $45 | ||
| Cell Phone | $20 | ||
| Netflix | $14 | ||
| Clothing | $30 | ||
| Restaurants | $150 | ||
| Incidentals/Discretionary | $100 | ||
| Health Insurance | $420 | ||
| Gas | $15 | ||
| Parking | $5 | ||
| Car Insurance | $32 | ||
| Car Registration | $5.75 | ||
| Savings | $803.25 |
I like to start my budgeting by making a list of all the things that I ever spend money on. Occasional parking, Netflix subscriptions, dog food; list out everything that you will potentially spend money on during the year. It can be easy to forget infrequent expenses: presents for special occasions, charitable donations, or vet visits. Even if it’s not a certain expense, still write it down. It’s much easier to eliminate an expense from your budget and move more money into savings, but you do not want to end up with expenses you haven’t planned for.
Zero-Based Budgeting
Although there are several types of budgets, I would recommend creating a zero-based budget. The idea behind zero-based budgeting is that the sum total of all of your income, savings, and expenses will always add up to 0. By creating a section for the amount you are saving, it is more directly clear how lowering expenses will lead to increased savings. Savings should be listed in your budget as an expense, just like groceries or transportation.The only difference between a regular budget and a zero-based budget is that once we are finished listing out all of the expenses for a given month, we can subtract all of our expenses from our income. If we have created our budget correctly, the result of this subtraction should be 0. Don't worry about it if you don't immediately come up with 0 when subtracting expenses from income. If you have a positive number this is a good thing! It means you have more money which has not yet been accounted for in your budget and you will need to add more expenses. Keep in mind this does not mean to spend more! You can always increase the amount going into savings to zero out your budget.
If on the other hand the result of your subtraction is a negative number, that means that you are spending more than you are earning. This is not sustainable and if possible, you should look for non-essential expenses that can be cut out of your budget. Belt tightening can be difficult to do in the moment but the goal of cutting expenses is always to better prepare ourselves for the future.
Budgeting Tips
Creating a budget for your expenses is not terribly difficult, but there are some strategies that will help your budgeting experience to be hassle and stress free. You should most likely start with a budget template. There's no need to reinvent the wheel; budgeting is a task people have been doing since before the internet existed and there is no shortage of budget templates that are freely available. Download our free simple monthly budget template, then simply add or remove line items as needed.Make sure you include a miscellaneous section. There are always unexpected expenses that pop up, whether it's a sudden plumbing repair or a car break in. Allocate a reasonable amount to this category, but keep in mind this is not a party fund! If you have no emergency expenses you can always repurpose that money towards savings.
One disadvantage of monthly budget calendars is that they do not take into account seasonal expenses. Family and friends have birthdays every year, not to mention Christmas and any other holiday where you might spend more than usual. One way to include these expenses is to pro-rate them on a monthly basis. Figure out what expenses you have which happen less frequently than monthly. This may mean car insurance and registration fees, as well as property insurance or HOA fees if that applies to you. If you pay it annually, divide the amount by 12 to determine your monthly prorated expense. If you pay it semiannually, divide by 6.
Do not be afraid to start! Many people are nervous of what they may discover when they create a budget; it can be incredibly stressful to know your spending is not sustainable, especially if you are already living a minimalist lifestyle. However, the devil we know is less dangerous than the devil we don't. Your expenses and income are the same regardless of whether or not you know what those numbers are. Knowledge is always a good thing, and creating a budget is the first step in obtaining the knowledge to get our finances where we want them.
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