The word “budget” is usually associated with restrictions. Like “dieting” it’s associated with cutting back, or depriving yourself of something. But we think that’s the wrong way to think about it.
A budget is just a plan for your money.
The first part of your budget is how much money you’ve got coming in. For most people, this is their monthly paycheck (or two biweekly paychecks) but if your income varies you can use your average monthly income as an estimate. If you’re going to estimate it’s probably safer to underestimate than overestimate; extra money will be a welcome surprise compared to coming up short month after month.
Now that you’ve got the “money in” covered, it’s time to account for “money out.” Your money you’ve got coming in during the month needs a job. There are different ways to go about this. Some people like to plan very precisely but you don’t have to do that. It’s ok to group similar expenses together into a larger category and estimate what you’ll need to spend there.
The easiest place to start is with your recurring monthly expenses.
List things like rent or mortgage, phone bill, car payments, insurance payments, streaming subscriptions, daycare payments, etc. These are the predictable expenses; you know you’ll be paying the same amount every month. You can also include things that are deducted from your paycheck before you receive it like 401(k) contributions or insurance premiums. However…
If you want to include expenses that are deducted from your paycheck (and you should), make sure to add those back to your total income.
For example, if your take home monthly pay is $4,000, but $200 per month is deducted for your 401(k), you would need to add that $200 back to your income for a total of $4,200 for the math to work out correctly.
After you list out your recurring expenses you need to estimate the rest of your expenses, sometimes called “discretionary” spending.
Your discretionary spending is where you have some choices to make every month. Things like groceries, dining out, traveling and entertainment, shopping for clothes and housewares would all be accounted for here. It can be tough to estimate these, but if you don’t have any idea what you spend per month on groceries that’s a good sign you need a budget. BrightDime’s budgeting tools can help with this if you choose to link your accounts. Your budget page will show you your average spending in different categories over the last few months, which is a good starting point for these categories that aren’t the same every month.
Now that you have the money in and the money out accounted for, it’s time to compare.
Our goal here is to have your money in and your money out be just about equal. If your money out is more than the money coming in, that’s a problem. You’re spending (or planning to spend) more than you’ve got coming in. You need to look for places to cut back, look for opportunities to increase your income, or both. Since most of us can’t just snap our fingers and make more money, start with looking for expenses that don’t give you much value for what you’re spending. Subscription services you don’t use very often, the gym membership you haven’t used in 6 months, and “luxuries” like dining out and shopping are the places where most people start.
If you’ve got more money coming in than you have planned to go out, then congratulations! But you’re still not done. Without a plan for it, that “extra” money is doing much for you. Consider increasing your contribution to your 401(k), HSA, or IRA. If you have near term goals you’re saving for consider opening a specific high yield savings account to keep track of it.
Now that you have your budget that plans out where your money is going you should review it every so often to make sure it still reflects what you want out of life.
Are you saving and investing for your future goals? Are you spending money on things you don’t really care about? Are you getting the most value out of the dollars you work so hard to earn? The real value of a budget is in helping you answer those questions.