Budgets. The sexiest thing on the planet.
Okay, maybe not. But budgeting is important! It’s a habit that most people aren’t taught to do. It’s a worthwhile task that can save you a lot of money. Budgeting helped me cut my monthly expenses by 32%.
The reasons people don’t budget: it takes too much time and it’s too complicated.
That’s why we’re going to walk through a quick and easy “how-to” process for creating your own budget — which should take no longer than 15 minutes.
Step #1: Identify how you pay for stuff
How do you pay for stuff?
Credit card, debit card, cash? Some combination of the three?
You might use cash for nights out and credit cards for things like groceries or clothes. Or maybe you don’t even have a credit card, so you use either cash or a debit card for everything. (Read me next for an overview of credit cards)
The first step to budgeting is simply identifying all of your payment sources.
If you use plastic to pay for stuff, your transactions are conveniently logged online via your financial institution’s website.
If you use hard cash to pay for stuff, you’ll need to save your receipts or record every payment. As you can imagine, it’s a bit more time consuming if you have to log all of your transactions manually. So this might add a few minutes, but it’s still the same process.
Step #2: Consolidate your expenses
If you mainly use credit and debit cards, this step is actually pretty easy.
Go to your bank/credit card provider’s online platform and download last month’s statement (excel or comma-separated values (CSV) format). You might have to click around a little, but it should be pretty easy to find. It might be under “Statements & Activity” — then you should see a standard download button.
You’ll need to do this for all of your cards so that you’re capturing all your spending.
Once you’ve downloaded your payment history, you’ll want to consolidate your expenses into one spreadsheet in excel. Your download should have transaction dates, a description of the vendor, the amount spent, and maybe even the card number or the exact time of the payment. You only need the first three for our handy-dandy budget (date, vendor description, and amount).
Unless you’ve been keeping track, you won’t be able to capture past cash payments. You’ll just have to do this going forward. Save your receipts, they’ll have all the information you’ll need to do the above.
Step #3: Categorize your expenses
This is where you can personalize and tailor your budget. More detail = more insight into your spending habits. But this also means more time spent budgeting.
Less detail = less insight. But less time spent budgeting.
It’s totally up to you.
My recommendation is to have at least five primary categories:
Housing, which includes rent, utilities, maintenance, property taxes, etc.
Transportation, which includes gas, Ubers, parking, metro, flights, etc.
Food & Entertainment, which includes groceries, dining out, alcohol, events/tickets, etc.
Goods & Services, which includes clothing, home goods, subscriptions, haircuts, etc.
Miscellaneous, which includes anything that doesn’t reasonably fall into the above categories.
Go line-by-line and label each expense with one of these categories.
Step #4: Evaluate your spending habits
Now for the fun.
It’s time to see where your money is going. Add up each expense by category, then divide each category by your total expense to get a percentage breakdown. For example, let’s say you have $1,000 of housing expenses and $3,000 of total expenses, so your “Housing” category makes up 33% of your total.
You should have a clear overview of your spending habits. There are a bunch of different templates and budgeting rules out there. Like you should only be spending X% of your income on Y — and so on. Some are pretty basic, such as the 80/20 rule: 80% of your income is for expenses, while 20% should be set aside for savings.
Here are some pretty standard percentages for our primary categories:
Housing: 25–35%
Transportation: 10–15%
Food & Entertainment: 20–25%
Goods & Services: 15–20%
Miscellaneous: 0–5%
It’s not an exact science. No two budgets are the same. Everyone’s spending habits are different. You may find that you spend only 20% of your income on housing — but 25–30% on Food & Entertainment.
But, you may have noticed that the lows of these ranges add up to 70% — while the highs add up to 100%. You should not be spending 100% of your income each month.
Ideally, you’re going to be somewhere towards the lower ends — because you need to be saving at least 20% of your income. If you can save more, you’ll be killing the money game.
Why create your own budget versus using a budgeting app?
There are tons of budgeting and money management apps and online platforms out there. And there are plenty of free ones too. You link your accounts to their site/app and they pull everything together to create your financial outlook — including income, investments, transactions, and your budget.
Creating your own budget in excel has become the digital-age equivalent of “doing it by hand.”
If you prefer to use a budgeting app, you can take that route. It’s more of a personal preference.
I prefer the DIY approach, because I find online platforms to be a bit cumbersome. I’d rather take the time to categorize each line item than have to backcheck and recategorize the app’s automated labels. Too often, these apps mislabel or double-count a bunch of stuff — at least in my experience.
It’s important to understand your finances, and budgeting is an integral step to obtaining that understanding. If you haven’t already, check out this post on why you should prioritize taking control of your finances.
By Carter Killman
Reprinted from medium.com and Bacon Bits blog