How To Set Up A Budget That Will Actually Work

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Today we’re going to change how you feel about budgeting. If you’ve tried before and it hasn’t worked, or never actually tried it because it sounded awful, we’re going to fix that.

Want to know the secret to making it actually work?

Budgeting only the money you actually have. Paycheck by paycheck.

What? Duh, right? I know. It seems super simple and logical when you hear it like that.

But that’s not how most budgets are set up.

Of course you can only budget the money you actually have. Yet budgeting each paycheck at a time instead of lumping everything together into one month will be a game changer.

If you shift the way you approach your budget and your bills just a little bit, it will make a big difference. Walk through this with me and you’ll see what I mean.

Figure Out Your Current Cash Flow

Income

Make a list of all your income sources. All of them.

I find a spreadsheet (Microsoft Excel, Google Sheets) is very useful because it will do the math for you. You can also sort the columns how you need to with a few clicks. This will all save you a bunch of time and give you added clarity and sustainability easily.

W2 income, freelancer/side hustle/part-time job income, alimony, child support, disability payments, pension distributions, rent payments from your tenant living in the house you own, the $20 your mom sent you in your birthday card.

Include the $20 your mom sent, but really we’re going for reoccurring income right now.

After you make a list of the sources, write the exact amount of money you receive from each source, and the date you receive it next to it. Break it down by paycheck, not the whole month lumped into one number.

If your income isn’t exactly predictable like W2 paychecks, use a reasonable, but conservative estimate.

Write your budget with the low end of your income, not the high end, if its not the exact same all the time. Then, if you have a lower week/month you’ll have planned for it and if it ends up being higher then bonus!

If you have one “normal” 9-5 W2 job and that’s all, this is going to be pretty straight forward. If not, that’s ok, this is still 100% doable so don’t stress.

Taxes & Retirement

Don’t forget to take taxes and before-tax retirement contributions into account as well.

If you use your salary as your income number make sure you subtract out taxes. Using your W2 paycheck amount for your income (the amount that actually shows up in your checking account each payday) makes this easier because taxes have already been taken out by your employer and accounted for.

If you’re using your after taxes paycheck amount (recommended), make a note on the side about any 401(k) or other retirement plan contributions you’re making via your paycheck, too, that go straight into your retirement savings plan and don’t make it into your checking account.

Thats automatic savings happening, which is great!

It doesn’t need to be a reoccurring line item in your budget every single paycheck because it likely doesn’t change and you can’t spend the money other places in the moment even if you wanted to.

I do want you to make a note of it though so you don’t forget you are in fact saving the money for your future.

When you write out your budget, if you don’t have ton left over for savings right now it may be discouraging. Remembering that you’re squirreling away money that you don’t see all the time is a lovely reminder that you’re doing better than you may think you are 🙂

Expenses

Figuring out your income only took a few minutes. Expenses will probably take a little longer, but fear not!

There are several ways you can approach tracking and tallying expenses.

Bills

List all the reoccurring bills you have, the amount (if it’s not a fixed amount each month, like your electric bill, estimate on the higher end), and the due date. This list should include every bill you have to pay every month.

Mortgage/rent, car payment, student loans, any debt minimum payments, cable/internet/cell phone, utilities, insurance, child care, etc.

Cash

If you’re primarily a cash spender and have no record of where your money has gone in the last month or two, start right now.

You can use a notebook, a notes app on your phone, a spreadsheet. Whatever works for you. A Google docs spreadsheet works great because it will sync between your phone and your computer.

A spreadsheet is recommended because it will do the math for you and you can sort your line items by category easily. Make the price it’s own column to make adding up totals a breeze later and save you a bunch of time.

Every time you spend money, put the date, item (or store or vendor) and amount on your list, each in their own column.

When you put gas in your car “gas” is acceptable for the item/store/vendor column. You don’t need to write the name of the specific gas station.

If you went to Target and bought groceries and some new throw pillows for the couch, separate those two out. Make one line item for groceries and another for the throw pillows, since these are totally different “categories”, or needs/wants.

Taking the extra minute to separate those things now will give you much more clarity down the road.

Don’t skip anything. Don’t say “that was only $1.99 so I’m not going to write it down”.

No feeling guilty about what you’ve already spent, just write it all down on your list. Don’t beat yourself up about the past. It already happened and you can’t change it so feeling terrible about it serves no purpose now.

Just bringing the attention to it will help you make the changes you want to going forward.

Start right now. Start gathering the data right this minute and don’t skip a thing.

Credit/Debit

If you do most of your spending via a credit or debit card, you already have a record. You have statements that go back for months that tell you where your money went, for better or for worse.

Your statements won’t tell you exactly what you bought at Target and Amazon, but at least you know exactly how much went out the door and have a good idea of where it was heading.

You can go about this a few ways.

If you choose the spreadsheet route, using your statement, put all your transactions into your spreadsheet. Do at least one full statement (one month) but two or three months are even more helpful.

It’ll take some time right now, but instead of having to wait weeks to get good spending data to work with, you can get it all together in an hour or two.

Use the same spreadsheet setup as the cash spenders above. Date, item/store/vendor, amount, each in their own column.

If you spend with cash and a card, combine everything. One spreadsheet to rule them all, don’t make separate ones for cash and cards.

How This Is Different Than What You’ve Done In The Past

We’re going to budget only the money you actually have. We’ll go paycheck by paycheck and pay expenses in the order they’re due.

Start with the balance in your checking account and any bills that are due to be paid before your next paycheck.

Put your checking account balance at the top of the first column in your spreadsheet. Under that list the bills to be paid before you have more income. List bill name, amount, and due date in three columns.

Once you have your bills listed add in expenses you must pay before your next paycheck. For example: groceries and gas.

At the end of the bills and expenses column use the =SUM( function to add up all the expenses, and then subtract that from your current checking account balance. That number is the remaining money you have after all your bills are paid before your next paycheck. That’s your new starting point.

Then we’re going to do the same thing all over again. Now your starting cash balance is what’s remaining, plus your next paycheck.

List all the bills that are due during your next pay period. Then the other expenses you’ll have to pay during that time as well. Add all the expenses up and subtract from the starting balance to get your remaining balance.

Rinse and Repeat

The remaining balance gets added to the next paycheck and the next round of expenses gets subtracted out.

Below is an example for someone who is paid on the 1st and 15th of every month.

The first column is the description, second is the amount of income or expense, third is the date the income or bill is expected every month. This is obviously a bare bones example but you get the idea.

You can tailor this setup for your pay schedule, weekly, bi-weekly, twice a month, monthly, whatever your income looks like. Just do a new list of expenses for every pay check.

The first and fifteenth paychecks make a “monthly” budget very easily since you’re paid twice each month regardless of weeks and Fridays. If you’re paid every two weeks your actual pay dates will adjust slightly and not fall perfectly into the monthly bin.

That’s totally fine! A monthly budget is arbitrary anyway! Just forget the monthly part and stick to your pay days. It will make everything much simpler, especially in the beginning.

I recommend going a few months out at a time so you get a good picture of what your income and expenses truly look like over time.

Automate It

I highly recommend starting with this spreadsheet and “manually” budgeting for at least a few months to really get the hang of it. It’s a little bit more time consuming, but not much if you stay on top of it, and I think it’s really important.

Being so “connected” to your budget and where your money is going will change the way you look at it, and really help you to stick to your plan.

After a few months, if you’re feeling really good about your budget and your plan and moving forward, You Need A Budget is a great way to automate your budget.

YNAB still requires input, monitoring, and for you to be hands on (which is required to maintain any sort of useful budget), but it automates pulling in income and expenses to your budget which is very helpful.

The approach You Need A Budget (YNAB) takes is very similar, which is why it’s my favorite budgeting platform/app. I’ve tried a bunch and that’s the one I’ve found to make the most sense and work the best.

With YNAB you only budget the money you have right now, so you prioritize bills and expenses by cost and time/due date.

You can budget money you have now into the future in YNAB but you can’t add in paychecks you don’t actually have yet. You can plan for them, but you can’t budget them until they actually hit your account.

That way if something changes or your income is for some reason less than you were expecting, you can still go from where you are instead of having to totally start over. This also prevents you from spending money/paying bills “early” and then not being able to un-do or reallocate that money to another place that may become more important at that moment.

Helpful Hints

1. Over estimate expenses and underestimate income

Unless you’re 100% certain, always over estimate expenses and under estimate your income. This gives you a more conservative budget and will lower the chance of having bills that are higher or variable income that is lower than expected and surprises that derail your plan.

2. Plan for the unexpected

You don’t know what you don’t know. BUT, you do know there are things you don’t know about yet that are going to come up. If you didn’t, now you do. There ALWAYS are unexpected things that pop up. It’s very annoying, and pretty much always true so just make your peace with it now.

Write your budget assuming you forgot something, so when it does appear, you’re covered.

3. Determine your priorities ahead of time

What are you going to do with “extra” money? After all your bills and expenses are accounted for, are you going to make extra payments towards your debt? Save for vacation? Build up your emergency fund?

The answer will be different for each person’s situation, but sit down and really think about it and make the decision ahead of time. Have a plan and stick to it. Don’t cave to your toddler brain in the moment, listen to what your adult brain said when you made your plan ahead of time.

4. Don’t forget about uncommon expenses

Think annual payments, or anything that doesn’t come up every single month. Car registration, annual memberships (Costco, Amazon Prime, rewards credit cards), birthday and Christmas gifts, having your HVAC serviced, etc.

5. Take into account what’s going on in your life

If you’re going on a road trip, you’ll need to budget more for gas than normal. And probably dining out, too. If your kid’s birthday is next month account for that in your budget.

Be realistic. Don’t try to squeeze a square peg into a round hole. Don’t try to keep your budget the same if you life circumstances are different this pay period.

6. Give yourself some grace

Make your plan. Stick to your plan. If you fall off the wagon, it doesn’t mean you’re a failure and you can’t ever do this and you’re doomed.

It just means you’re a human with a human brain. Welcome to the club.

Learn from your mistake, take steps to lower the chance of it happening again, and keep going.

Budgeting is a fluid process. Learning how to do it initially will probably take a few cycles to dial it in and figure out what works for you. But also as you, your life, and your family grow and change your budget will evolve with you. Even after you’ve got it nailed down for a while, as you life changes, so will your budget.

Hold yourself accountable, for sure. But if it goes a little bit sideways for a minute, learn from it and keep moving forward. Don’t abandon the whole plan and your goals.

If you’d like extra help with your budget, accountability, money mindset, setting and achieving goals, and mastering your finances, check out my coaching program!

Ready to get your financial shit together?  Check out my free resources or schedule a free insight call and see what your future has in store for you.

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Written by Kayla

05/18/2020

Change Your Money Life Forever

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