As a CPA, I could say that I know a thing or two about creating a budget, planning our family's finances, and how we manage our money.
And trust me, I've gone through various iterations of budget templates myself over the years to manage our family's money. When you have a hectic schedule as a mom with two kids building a business, it can get challenging to monitor your finance in an easy, simple way.
Rich and wealthy people know how to manage their money well. If you wish to be rich and wealthy, I think it's critical that you also know how to manage your money well as well. Know how much you are currently making and spending, while focusing on growing your net worth.
How To Budget Your Money In 5 Easy Simple Steps
So, where do you start?
After many iterations of my own budget template that I created using various tools, I wanted to share the budget template that I use. You can download the template here to help you get started.
There are many ways to create a budget but I would like to first describe 50/30/20 budget as it is widely known.
This method has been popularized by Elizabeth Warren's book "All Your Worth: The Ultimate Lifetime Money Plan.". The idea is simple. You calculate your after-tax income - distribute that income as the following:
- 50% on Needs - Needs are things that we need for survival such as mortgage/rent/car payments/groceries
- 30% on Wants - Wants are things that are not absolutely essential such as going to movies, dining out, shopping
- 20% on Savings
With this method, most people struggle with separating Needs vs Wants. For example, if I buy organic grass fed meat at a grocery store vs. buy discounted meat at Smart & Final, is that considered needs or wants?
What I would recommend in sticking to this budget is first putting away your savings and then work with the rest to allocate to Needs/Wants and not exceed what you have set for the month.
Putting money away as savings first will help you stay on track to meet your financial goal, rather than determining what's left to save.
So here are the 5 steps to creating a budget and managing your finance on a monthly basis.
Step 1: Calculate Your Monthly Income
List all of your income sources. If you have a job, this step might be simple for you. You just have to calculate how much you get paid on your paycheck.
If you have side hustles or any other sources of income (rental income), you will have to list these out as well.
You can populate this information at the top of the budget template as below:
Step 2: Calculate Your Savings
Using 50/30/20, you calculate 20% of after tax income to be your savings. This percentage may be different for you, if you have a higher savings goal or if you don't think you can save 20% of your after tax income. Whatever your savings goal is, you calculate what the savings amount is and set that aside first. This can be a combination of few different financial goals you have. For example, you may wish to save money for a trip you are planning. You may want to set aside money for your kid's college education.
On the budget template, you can calculate this as the following.
The best way to set aside money for savings is setting up a separate savings account and putting your money away.
Step 3: Determine your fixed spending
This would be categorized as 'Needs' per 50/30/20 rule. You would need to calculate how much fixed bills you have. For example,
- Rent/Mortgage Payment: $1000
- Utilities: $200
- Student Loan Payment: $150
- Cell Phone: $90
List all of these fixed bills on your budget worksheet. And then move on to the next step.
Step 4: Determine your discretionary spending
This is where you can categorize your expenses into various buckets. Other than fixed expenses under Step 3, these spendings are something that you can control such as shopping, dining out, gifts, and personal care. Going through this step will make you realize how much you are spending on certain categories. I would be surprised how much small trips we were making as a family were adding up! This was an eye opener for us as we were surprised how small weekend trips here and there added up.
On the budget worksheet, you can add expenses for each major category and see where you are spending your money. This will help you determine where you can possibly cut costs and change your spending behavior to save more money in the future.
Step 5: Monitor and Adjust Your Budget
This is your time to take actions! Your financial goal will be nothing if you don't take actions now.
The first time you start your budget might take the most time. But as you repeat the process every month, I guarantee you, it will get easier and faster to monitor your finance. And you will enjoy the benefit of seeing how your wealth grows.
Set aside time with your significant other every month to discuss the result of the budget. I monitor the budget on a weekly basis but would discuss with my husband on a monthly basis to discuss how we are doing and what areas we can do better.
Another alternative to tracking your expenses is keeping tack of your spendings automatically.
Apps To Help You With Your Budget
There are great apps and services that help you with this process. The two that are free and are most popular are Personal Capital and Mint.
Mint is one of the most popular personal budgeting tools out there to track expenses. It allows you to link all your credit cards and bank transactions and provides the ability to categorize those expenses. You can easily see where your spendings are going and also provides ability to create budgets in each of the category. It's also free to use. If you are a beginner to creating a budget and tracking your expenses, I suggest you check out Mint.
Personal Capital is very similar to Mint. Personal Capital is a free app that provides you the ability to create budgets, track expenses, and also monitor your investments. In addition to the features mentioned under Mint, Personal Capital provides more strong features around monitoring investments than Mint. So if you are an advanced budget tracker that's less interested in tracking monthly expenses and creating budgets, this is a great service to start monitoring your investments.
Before you know it, you will be glad you started today, as you enjoy your financial success.