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Budgeting 101 | How to Create a Personal Budget

August 30, 2020 7 min read

Financial Footwork Money Coach & Online Financial Literacy Education

 

Budgeting 101 | How to Create a Personal Budget

Do you know how much money you spend every month? Let’s try an exercise I do with the professional athletes we work with.  


I would like you to think about your last five transactions. Where did you spend your money? How much did the transaction cost? What did you purchase?
 
Some of us might be able to complete this exercise. The majority of us would struggle to remember exactly how much we spent, what we purchased and where we spent our money… 


Are you shocked with what you can or cannot remember? Was this easy for you? If it was, great! Try it on a friend, I bet you they will struggle to get all 5 exactly right. Why is that? 

 

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Why this exercise is difficult for the majority of people, is because it’s very easy for us to swipe the card and keep moving without thinking much about what we spend our money on. Or more importantly, how much the transaction costs. When we operate using cards, it is easier to simply swipe and go, without much  thought.
 
This example is just one of the many reasons having a monthly budget is so important! Budgeting brings awareness to your spending habits which helps shape your overall financial picture. Knowing your numbers is a big part of winning with your finances. 

What is a budget?

Your personal budget is a roadmap to your spending habits and personal finances. It breaks down your monthly income, (money you bring in), and expenses, (money going out), and puts them in easy to use categories so you can keep track of where you money is going. 
 
Let’s simplify this even more. Your budget is a list of everything you spend money on each month. Using that list, we compare it to what you earn, and see if you were saving money or if you were spending more than you earn. 

Simply put, your budget is your spending check. It can be painful like the linebacker that comes out of left field and sacks the quarterback, or it can be rewarding, like finishing a marathon after months of training.  A budget is a great reality check and it is one we all need.  

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A budget does two main things: 

First: Estimating how much money you spend on a monthly basis in each category of your budget, (housing, transportation, food, etc.).
 
Second: Tracking how much you spend, and where you’re spending it throughout the month.
 
Sounds easy right? Write down what you think you’re going to spend, and then watch what you are spending money on.
 
Fun fact, according to a Gallup pole, “68% of Americans don’t have or use a budget.” This means that most of us are not using a budget. It also means those people not using a budget, do not know where they stand financially month to month. For most people, awareness of their financial picture is rather low.
 
Financial Footworkstrives to change that norm. We give you the tools and coaching you need to build your budget for the first time, and then continue adjusting your budget each month as you get used to tracking and understanding your money.
 

Breaking down a Monthly Budget

Using the budget we’ve created in  My Money Playbook 1.0,we’ve taken your budget and broken it into 11 categories to track and manage your estimated monthly expenses. Most monthly budgets will have some variation of these categories:

PART 1 - Budget Categories 

  • Housing
  • Transportation
  • Food
  • Child Care
  • Entertainment
  • Personal Care
  • Loans/Credit Cards
  • Pet Expenses
  • Savings/Retirement
  • Donations/Charity
  • Legal

There are a few different budget standards the financial industry recognizes, most notably is the 50/30/20 rule:

50% Needs

30% Wants

20% Savings

Ideally you should be managing your budget to this rule, 50% needs, 30% wants, 20% savings, based on your take home income. Today, with the cost of living continuing to climb, we realize how difficult hitting these buckets can be. 

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Building a budget takes time, repetition and consistency. It can take about 6 months to really master spending habits and find patterns in your financial life. As you become more comfortable with your budget you can start making adjustments, re balance, or simply find ways to reduce your expenses.  This will help you find your 50/30/20 balance. 

For example, I had a friend who recently hit six months solid with her the My Money Playbook financial coaching guide and she found three areas she could improve her spending habits, and her quality of life.  

First, she put together a plan for saving $250/month every month based on her income. She had a few credit cards she needed to pay off and used her budget to make a plan to get those paid in full as quickly as possible. She was able to pay off her credit card debt in 5 months and has now increased her monthly savings to just shy of $1000.  

Second, she had her car and renters insurance bundled to save her money monthly, that saved $27/month. That $27 month to month adds up!!! She took that $27, and put it in her meals out budget so she could go out to happy hour with friends one to two more times a month. Quality of life win!

Third, she loves loves loves LOVES clothes. She didn't want to lose the ability to get a new garment monthly, so she decided that she was going to budget a specific amount monthly so she could always have money in her “clothes” account—[a separate checking account for her clothes]

Are you thinking, “ this seems excessive! An account for clothes?!” I’m going to stop you right there. What do you love? What things do you like to do? Wouldn't it be great if you had a small pile of cash to be able to do the things you love all the time? 


That’s what happened with my friend. She loves clothes, so that is where she put her play money. It’s in her budget, and she has an account just for that so she managers her spending and can get things as she sees them. Again, win win!

As she finds things she wants to buy, that account has enough money for one to to items every couple months. This was a huge win for her! It keeps her in check on going crazy with clothes and still allows her to get those pieces she really loves. And it’s the same sort of when you can have with the proper budget.

Three big budgeting wins putting her closer to aligning her budget with her long term goals. She may not be at the perfect 50/30/20 split, however, her budget is working very well for her and that is the key. 

We like the idea of the 50/30/20 but be patient if your finances are not perfect right out of the gate, it takes time and practice, (every month), to build a solid budget that works for you.  That 50/30/20 split might not be ideal for your lifestyle, that’s fine. Make it work for you and keep it consistent, your budget is YOURS, your roadmap your goals. 

PART 2 - Estimated versus Actual Budget Columns

Your budget is your tool to tell your money where to go (categories) and howYOU want to spend it. That is where the act of budgeting actually comes in!

A personal budget will have two columns. Theestimated column and theactualcolumn, different budgeting tools might use different terms. However the concept is the same budget to budget. 
 
At Financial Footwork we use the terms estimated andactual. 

Estimated- your estimate of what you think you’re going to spend in a monthly period. 

Using your budget, you willestimate your spending for the month. This is typically done at the beginning of each month so you have a handle on what you can anticipate your spending for the month.
 
Actual -what you actually spend in a month.
 
Tracking your spending is key to having a successful budget. If youestimate your expenses and don't look at what you are actually spending, you are not budgeting! 

Using an expense log/tracker which you can find inMy Money Playbook 1.0, write down your monthly bills, purchases, and payments as you make them. If you start writing down your transactions as you make them, you will find clarity quickly in how you are spending money and the daily act of writing your purchase down will save you time weekly and monthly as you add up your spending figures towards the end of each month.  

Budget, tracking, money, budget how-to, learn to budget, budget planner, budget book

The act of writing your expenses down is one of the key habits you can create when starting a budget and implementing strong financial habits. Track your purchases daily and calculate your spending monthly, this is how you calculate and complete the actual column of your budget.

At the end of the month you will compare your estimated vs your actual spending. This is where you get into the nuts and bolts of your spending habits and make changes to improve your life. Comparing your categories month in and month out will help you find your financial patterns and make improvements. 
 

Does having a budget actually work?

Now we know what a budget is and the basics of how to use it. Will it actually work?

The answer is yes, if you actually implement it and use it monthly. Your budget gives you insight into your spending habits, things you need to improve financially, ways to save and eventually track how to achieve your personal financial goals.  Things like, buying a home, getting your dream car, saving for a trip. Your budget makes those dreams attainable if you use it consistently and hold yourself accountable to what you want to accomplish. 

Your budget is on you, if you can stay disciplined with it and set realistic goals for your money. Your budget will get you there! 
 
You will find that there is an immense sense of relief and freedom that comes from knowing exactly where your money is going and how it works for you! Take the guesswork out of your money and eliminate the stress or not knowing. Start a budget and bring clarity to your life. 

 

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