Managing Money Do You Actually Know How to Create a Budget?

by Ellen Sheng April 08, 2019

Budgeting is something most people think they already know how to master. But do they really?

First, let's clear up a misconception: For many, a budget is synonymous with limitations, but, more positively put, a budget is actually about planned spending.

Having a budget helps you chart a route for your personal finance, find balance in your spending and help position yourself to meet short- and long-term financial goals. Um, what limitations?

What is a budget?


Think of a budget as a map with clear directions detailing how you can reach your financial destination. A budget gives you a clear plan to live within your means, not overspend and achieve goals. “Budgeting gives you the freedom to say 'yes' to things that matter and 'no' to things that don’t help you reach your goals,” says Whitney Hansen, a money coach based in Boise, ID. “Most people view budgets as restrictive, but they are actually empowering."

Learning to live within a budget can require a little shift in thinking because "by saying yes to something you are saying no to something else," she acknowledges. But instead of focusing on all the things you can't buy, Hansen suggests focusing on what you are saying yes to.

"By getting your finances in order, you are saying yes to financial security, peace of mind and things that are directly in line with your values. Sometimes we just have to remind ourselves of that," she says.

Map out the numbers


The first step in creating a realistic budget is having a clear picture of your income and how you spend it. A spreadsheet is a handy tool (digital or analog) for accomplishing this. First, add up your monthly take-home income from all your sources — regular salary, freelance, side hustle or some combination — and calculate your monthly average.

Now that you know what income you have to draw from, start to track your spending. Use a pen and paper (get creative with a bullet journal) or online tools such as Mint.com or PersonalCapital.com. Whichever you choose, you’ll want to sort your spending into “buckets” such as mortgage or rent, utilities, car payment, internet, insurance, food, gas, entertainment and so on. Breaking down your spending into categories can help you make adjustments to your spending.

Quote
Budgeting gives you the freedom to say "yes" to things that matter and "no" to things that don’t.
End Quote

Take a look at spending habits


To identify spending trends, Hansen suggests this exercise: Print the last 30 days of transactions from all your accounts. Write down three categories that you either overspend on or aren’t sure how much you spend on, such as “eating out” or “online subscriptions.” Use a different color highlighter for each of these three categories, then go through every transaction, highlight those that apply, and add up the totals in each group.

“This is incredibly eye-opening and will help you see what areas you can make improvements in. See if there is anything you can cancel or any charges you forgot about,” Hansen says.

If you’re struggling to figure out what spending you can cut, Tim Jordan, a money coach in Chicago, IL, advises asking yourself questions such as “How much time will I spend on this?” and “How much fun do I have doing this?”

“If the answer is ‘meh,’ then it’s probably fine to stop spending money on it,” he says.

Define your goals


Now that you truly know what you can spend on, consider both your short-term and long-term goals. Short-term goals — buying a new car or paying off credit card debt — might be something that you hope to achieve within the next year or so. Long-term goals stretch further into the future — saving for a home, college for the kids or a retirement fund. Do some research to tally up how much you need for each of these goals and a timeline, if that applies.

After moving around for years, Alyssa Wolfe, a New Jersey mother of two, had a long-term goal: buying a home so she and her husband could settle down and stop spending money on rent. After doing their homework, they learned that if they saved enough to put a full 20% down on a house, they could get a more favorable mortgage rate.

It took them five years, but they achieved their goal of saving a 20% down payment by taking only family-related vacations, eating out less, cutting cable service and selling items they no longer needed. To stay motivated while in savings mode, her husband had a side hustle of buying designer suits at thrift shops and selling them online. Those profits helped them create a “fun money” fund for date nights and purchases beyond their everyday budget — proving that it's possible to budget and have a good time while doing it.

Make adjustments and recalibrate


Once a budget is in place, you can’t just set it and forget it. You’ll need to check in regularly and make adjustments.

Orin Okes-Kincade, a newlywed in West Virginia, says that he and his wife monitor their spending once a month and make small adjustments accordingly. When they notice that the cost of something changes, they re-evaluate their expenditures to see if it's still within their income.

“Our streaming media subscription is going to raise their prices soon,” he says. When this happens, they plan to plug the new costs into a spreadsheet and see if they need to cut back someplace else. They also do a more significant evaluation every year to address any bigger changes that are needed.

Following your budget can help you better understand the sacrifices needed to meet a goal and clarify how much it really means to you. Jordan says that you may find out, while budgeting, that a goal isn’t as important as you thought. “I personally cannot sacrifice everything. It’s easier for me to be able to balance living life now while working toward a goal,” he says.

Quote
You may find out, while budgeting, that a goal isn’t as important as you thought.
End Quote

Creating and sticking to a budget takes work. But the upside makes it worthwhile. A budget helps establish a mindset — and good habits — that put you in charge of your money and on the path to spending that's in line with your values and goals.

 

Ellen Sheng learns about managing her finances by interviewing experts. Her stories have appeared in The Wall Street Journal, Forbes, Fast Company and Marie Claire.

 

The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.