Personal Finance: Making a Budget

Budgeting money is one of those life skills that not enough people pay attention to. Only about a third of US households keep and maintain budgets, yet about 41% have some amount of credit card debt. While it may be completely optional, it can help cut down or even eliminate your deficits. Having good habits in terms of keeping track of your money goes a long way in becoming financially secure.

Basics of Making a Budget

The main principle of a budget is very simple. It lists your sources of income and subtracts your expenditures from it. The goal is to make sure your income is more than your expenditures (budget surplus) and avoid the opposite (budget deficit). When planning a budget, always make sure to subtract mandatory expenditures first like taxes. This leaves you with disposable income. Then factor in necessary expenditures like rent, utilities, and transportation (“paying the bills”). The money you have leftover is called discretionary income, and it’s the money you can spend or save however you want. There are many ways you can plan your disposable and discretionary income:

The 50/30/20 rule. This is the system introduced by Harvard bankruptcy law expert and current US Senator (D-MA), Elizabeth Warren. You take your disposable income and split it into 3 parts: 50% for needs like rent and utilities, 30% for whatever you want, and 20% for savings. The only tricky things here are making the distinction between “needs” and “wants” and making sure the amount you spend for needs fits in that 50%. For example, if maintaining a car is too much, consider public transportation.
The 80/20 rule. This is a looser version of the 50/30/20 rule. Basically you set aside 20% for savings and use the rest for any type of spending. This removes the hassle of needing to distinguish between needs and wants. Just pay the necessary expenditures and use what’s left for discretionary spending.
The envelope rule. This system is for discretionary income. At the start of a month, put a certain amount of cash for each category of spending in separate envelopes. Once the money in an envelope runs out, that’s it for that month. If you decide to use this approach, try it for a few months and then adjust the amounts if necessary. For instance, if you feel that you need more for food, increase the amount set for food and reduce the amount for something else like entertainment. Although using cash can make you more aware of how much money you’re spending, if you don’t like using it, this system can work just as well electronically. You just need to keep track of your receipts and credit card statements on a spreadsheet.
Saving a certain amount each month for specific, planned purchases. This is another system for discretionary income. In addition to your standard savings, you set an amount aside each month for specific items you want. For example, if you want a new computer that costs $1000, set aside $100 a month for it, and buy it after 10 months. This helps prevent impulsive purchases and gives you some time to let you think about whether you really need something.

Whatever system you end up deciding on, make sure you’re willing to stick with it consistently. The most brilliant budget strategy won’t do you any good if you think it’s too much of a hassle and end up forgetting about it.

Tracking Your Expenditures

Tracking how you spend your money is a key element in any successful budget. Unless you’re using just cash, you need to keep track of your expenditures, or you might end up spending more than you can pay, which is the first step to drowning in debt. There are several ways to do this:

Use pen and paper. Super old fashioned, but it works. Whenever you make a purchase, jot down the amount on the receipt on a dedicated notepad along with the date and a brief description.
Use a spreadsheet. A modern take on the pen and paper method. Spreadsheet programs like Microsoft Excel are essentially glorified calculators. Not only can they give you the total amount you’ve spent and how much you have left, but they can also represent your data in graphs so you can spot problem areas.
Check your credit/bank accounts online. If you put all your expenditures on credit or debit cards, you can check your expenditures by looking at your account(s). Your credit card company/bank will post all your transactions in a list that’s updated in real-time.
Use a budget app. Whenever possible, use your bank’s budget app. If your bank doesn’t have one, be very cautious when selecting a third-party app. Remember, this is your financial data, and identity theft is very real. Make sure the app uses 128-bit SSL encryption, has security scanning with VeriSign, and uses multi-factor authentication (logging in requires at least 2 separate pieces of data like a password and a fingerprint).

Some Tips For Saving Money

Having some trouble finding things to cut? Often, it’s small things here and there that end up eating away most of your budget. Here are some ways you save some money:

Stop buying coffee at a coffee shop every day. Although it’s convenient, you can brew your own coffee (just the way you like it too) for literally cents a cup. For example, let’s say you spend $3.25 for a cup of coffee every day, and it takes 25 cents to brew your own cup (ground coffee is less than 10 cents a cup, so I’m just throwing 25 cents out there because you might be adding other stuff). Over the course of a year, you would save $1095!
Avoid impulsive buying. Sales will come around again, and many small things can be bought in bulk for a lot cheaper if you really need them. For example, don’t buy things from vending machines. Everything is way overpriced, and you can get the same product in bulk at a supermarket.
Cut down on the number of subscriptions and memberships you have. Do you really need that cable TV subscription or that expensive gym membership? You can substitute both of them with much cheaper alternatives like watching TV online and working out at home.
If you want something relatively expensive, shop around online for the best deal. If you really need something and money’s tight, see if you can buy a used or refurbished version. Textbooks and electronics like laptops are good examples of this. For electronics specifically, look for refurbished products over used ones. Before they’re rebranded as refurbished, electronics that are returned to a company typically go through a strict checklist that tests how functional the device is. Used electronics don’t have to go through such a checklist, so you may end up with something that’s defective in some way.
Pay any loans or credit card debt off as fast as you can. The faster you do, the less interest you’ll need to pay. You may have to cut down on other stuff in the short term to pay it off, but you’ll save more money in the long term.
Use cash if you have to. Some research suggests that paying money is linked to the sensation of pain, at least in the brain. Credit cards take away the sensation because you’re just swiping or inserting a card. When paying with cash, you actually lose something physically (the money), and you can clearly see it (emptier wallet). Not only that, it acts a physical barrier to spending more than your budget allows because you can’t spend cash that you don’t have.
Update your budget frequently. The budget you’re using now may not be the same as the one you were using a year ago. You might have new expenses like extra traveling costs or new revenue like a pay raise. If you don’t update it, you might go off course and accidentally spend more than you can afford.
Always try to save something. Some of the plans listed above require you to set aside a certain amount each month for savings. While it’s good advice, the key is not the specific amount, it’s the act of saving. Save what your budget allows each month instead of spending any extra money you have. Nearly half of Americans have trouble dealing with a $400 emergency. Setting some money aside for emergencies is vital since you never know when you’ll get whacked by some bad luck like a flat tire, a serious illness, or even a government shutdown.

Making a Budget Using a Simple Spreadsheet with Microsoft Excel

Here, I’ll show you how to make a simple budget spreadsheet using Microsoft Excel. I personally prefer making my own spreadsheet instead of using an app because it’s free, I don’t have to worry about identity theft, and I’m in full control of my data.

1. Setting up the format. First, set up the spreadsheet like this. Just type the words in the boxes as shown in Figure 1. This is just an example. You can format it any way you like.

2. Set up the formulas. This is where Excel shines. If you set it up right, the spreadsheet is smart enough to know how to apply your formulas and will update them as you add entries to the spreadsheet. First, for each blank area to the right of “Total”, click on the box, type “=”, click on “Insert Function” (the little “f_x” symbol), select “SUM”, and highlight the two corresponding boxes where the “Amount” would be as shown in Figure 2.

Press okay when you’re done. The box should now say “0”. Repeat this for all the other empty boxes next to “Total” as shown in Figure 3.

For “Total Income” just type “=”, click on C5, and press Enter. For “Total Expenses”, type “=”, click on “Insert Function”, select “SUM”, and click on each box where a total amount would be in the Expenses section (put a comma after you click each box) as shown in Figure 4.

For “Money Left”, type “=”, click on the box under “Total Income”, type “-“, and click on the box under “Total Expenses” as shown in Figure 5. Then press Enter.

At this point, you should save the spreadsheet. You want a blank copy so that you can reuse it. Just remember to save the version that you’re actually using under a different name.

3. Fill in your data. Now you just fill out the empty boxes with your data. If you’re adding another entry, just highlight empty space under the last entry (date, description, and amount), right-click and select “Insert…”, and then select “Shift cells down” as shown in Figure 6. Then type in your new entry in the newly created space.

This will preserve the formulas you set in step 2. As you can see in Figure 7, all the boxes are automatically calculated after you put in your entries.

Who Is Budgeting For?

Obviously, people with money problems are the ones who need to have a budget the most, but anyone could benefit from it. Whether you’re trying to save up for something or just want some more discretionary income, using a budget can help free up money that you didn’t know you had. I put it this way: the more money you save, the more money you have for things that you really want.

I recommend that people start learning about or teaching their kids about budgets as early as possible. Doing so will help identify what kind of budget plan works best and weed out any bad habits. Plus, by starting early when the amount of money you’re managing is small and relatively inconsequential, you can afford to make mistakes and correct them for when it really matters.

(Be sure to also check out my post on managing credit cards: Personal Finance: Managing a Credit Card)