The Basics of Budgeting — Getting Started
Effective budgets are automatic. They shouldn’t drain you mentally, and shouldn’t feel like you are on a “monetary diet.” or financially deprived. Budgets support your lifestyle.
You have a budget now (even though you might not realize it) and it is defined by your actions and inactions. The goal of a written budget is to align your finances to support your goals and lifestyle. That’s it. Here are 10 steps to help you get started.
10 Steps
- Goal Planning
- Gather information
- Construct budget
- Research current habits
- Compare and Align
- Identify action items
- Automate
- Execute
- Revise
- Repeat
Goal Planning
The unexamined life is not worth living. — Socrates
Write down your goals. I’m not talking just financial goals. What do you want to do? Buy a home, pay off a car, travel to Finland, send your child to school, retire, install a cold brew tap in your apartment— the list can be long.
Identify your top 5 goals. Prioritize them. Then categorize them as short term (0–2 years), medium term (1–5 years), or long term (over 5 years).
Gather Information
Pull together all of your financial information. You’ll want to know the following basic things:
- Income sources (job, rental property, stipends, side hustle) — pay stubs
- All bank accounts (checking, savings, brokerage, retirement accounts, certificates of deposit (CDs), money markets, etc…) and make sure you can access all of them
- All debt (mortgage, student loans, car loans, credit card debt, equipment finance — like washer/dryer purchases) and make sure you can access all accounts
- Assets (house, car, investment properties)
Pro tip: Write down the access information to your accounts in a safe place! Or memorize it! Know how to access your accounts, it will save you so much time in the future.
Construct Budget
Organize the information into a format that’s easy for you to read and update. One month is a good timeframe to use. Begin with your monthly income. Then determine what you think you need to save in order to meet your goals (pay yourself first!). Work your way from most essential predetermined expenses (taxes, mortgage, debt payments) and move down to more variable expenses (food, gasoline, utilities, phone). This will reflect your ideal budget.
Remember: “ideal” is in the sense that you are working with what you have. It would always be ideal to make more money, to save more money, or do more. But the budget is a tool for what’s realistic right now.
Research Current Habits
Estimate how much you spend per month on each expense category. Use your credit card or bank account statements or list of transactions, which you can usually find under your account on your bank’s website or phone app. I suggest reviewing 1–3 months of past transactions. This will help you identify unobserved habits or trends. Also, keep in mind one-off expenses like wedding gifts or a car repair, because these do not affect every month. Come up with you average monthly expenses by category.
Compare Ideal Budget with Current Habits
Look at the trends in your spending versus your ideal budget. Are your estimates reasonable for your ideal budget? Maybe you estimated $100 for eating out, but after reviewing your actual habits you really spent $250 last month. That goal is a bit aggressive, so revise your eating out goal to $200 — something more manageable. Budgets should get you focused, but fit your lifestyle. If social dining is an important aspect of your life, realize it and support it. But by reducing that spending slightly, you can save for a new bike which is also important to you.
Align your budget with your spending habits. You will know where you can save, and where you cannot (reduce your weekly visits to Starbucks from 4 to 2 times, but still expect to send your kids to child care every day).
Identify Action Steps
When it is obvious that the goals cannot be reached, don’t adjust the goals, adjust the action steps. — Confucius
Look at your goals that you have set out to accomplish and the timeframe you expect to accomplish them. Using your new budget, identify the most important actions that you have to take to to realize your goals.
For example. Say you have two short term goals: 1) to pay down $2,000 of high interest credit card debt and 2) to save $5,000 to renovate a portion of your kitchen.
Eliminating that short term debt is first priority. You would allocate a higher portion of your available cash each month to pay down your credit card debt. Once the debt is paid, you could allocate the debt payment towards the remodeling goal.
Automate
This is the most important step. Set it and forget it. Make it automatic. When you automate your budget, you set yourself up for success.
On the days you get paid, set up an automatic transfer to an account which is not your checking account. This way — you will not be tempted to spend money you don’t have. Set up auto-payments for all credit cards, mortgage, recurring bills. This will relieve mental stress and let you save your willpower for things which are more important to you.
We at Tventures can sit down with you to make phone calls, set up accounts, or help with these steps in any way.
Execute
Put your budget into action. Commit to using it for 1–3 months. Once you automate, the only things you need to keep track of are variable expenses. If you grocery shop once per week (4 times per month) and your grocery budget is $200 per month, then set a mental goal whenever you do your shopping to spend $50. It’s a guideline. It’s okay to go over (or under!). You’ve already thought this through and determined what you should spend. Try to stick to it. Keep written notes or mental notes on what works and what doesn’t.
Revise
So, it’s been 3 months. You’ve been following your budget. Some things are working great. You love that your brokerage account has grown by $600 since you decided to save $200 each month there. You haven’t had to remember that on the 16th to make your car payment because it just happens. But you are blowing through your grocery bill each month. You wanted to spend $200 but really you’ve been spending $250. That’s fine. It’s going to happen. So revise your budget to have enough for groceries. If you don’t, then your written budget doesn’t represent what you are doing and that means it’s not your plan.
Revision is an essential part of a budget’s success. You change throughout time. You achieve your goals and move onto new ones. You decide that a goal is no longer important and life changes. Revise your budget every so often to make sure you are still on track. Stick to the plan and the plan will work.
Repeat
Once per year, repeat the process (or at least consider all of the steps) and update your budget for your situation. Did you accomplish some of your goals or action items? Did you eliminate or change your goals? Did something significant change about your life — changing jobs, marriage, new child, purchase a home?
Have more questions on the specifics to each step? Or do you want some guidance getting started? Tventures is here to help. Check out our other Medium posts or our website www.tventures.co for more information.
