When it comes to budgeting there’s definitely an app for that. To create a budget, you can go to many platforms, follow many different tricks, tweaks, systems, and ideas. But in life, there really is no substitute for hard work and getting your hands dirty.
Doing the work of budgeting will make income and expenses more tangible, so you can really understand where you are starting from as you build your Uncommon Life. It is work, but it does not have to be complicated. Budgeting can be overwhelming, so we wanted to boil it down to its simplest form.
Here are three simple steps you can take to create and stick to a budget.
Step 1: 90 Days of Data
The first step in our budgeting process is getting 90 days (3 months) of bank statements and/or credit card statements. These will show you the expenses that stay fairly consistent on a monthly basis.
These days, people have a number of expenses that are debited automatically each month, like the mortgage, subscriptions to Netflix, a car payment, or the electric bill. Create a simple chart on a spreadsheet or even a sheet of paper. We call these recurring charges or expenses.
Write down the following:
- the date
- the vendor name
- the amount of the debt
Now add all of those expenses up for the last 3 months. The amount for each month should be fairly consistent.
To get the monthly average, add up all 3-month totals, and then divide by 3. This is the average you are spending per month on recurring expenses.
Step 2: Discretionary Spending
Next, you need to create your discretionary budget categories. These are things that may be recurring, but it’s up to you how much you spend. Think about categories like clothing, home improvements, entertainment, gas, etc. We think the fewer categories the better, but whatever works for you!
Now go through the last 3 months of bank statements and write down the expense into the categories you’ve established. Then, as you did with the fixed expenses, add up the expenses per month per category and then take the average and write it down something like this:
Category Month 1 Month 2 Month 3 3-Month Average
Now, add up the total of all the categories for the average of the 3 months.
You now have your two main expenses – the automated or recurring expenses and the monthly average of the discretionary expenses.
When you add up those two numbers, you have the total dollar amount you need to hit in order to meet all your obligations in a given month.
Now do a little bit more thinking. Getting at this number requires consideration of all your expenses across a year. Are property taxes included in your mortgage payment? If not, you’ve got to include the per month average even if you pay it in one chunk mid-year. How about vacation? Car inspections and registrations? School registration or kid’s tuition payments? Make sure nothing major is missing from the recurring or discretionary spending categories, and add them in to calculate the monthly average.
Step 3: 10%
You’ve taken a look at past spending, now it’s time to measure the present. Step 3 involves tracking spending for the next 90 days. The method you choose is up to you. You can use the envelope method, or there are many money-tracking apps you can use. We think the simplest method is to just follow the same spreadsheet system of tracking your spending with bank and credit card statements that you did in step 2.
At this point, we often challenge clients to consider reducing their expenses by 10%. This is probably not going to be an across-the-board cut, but a matter of making small, sustainable changes. No need to eliminate anything 100%, just look for ways to spend a little bit less.
Putting Your Budget to Use
At the end of this exercise, you will have 6 months of meaningful data. You are now in a position to know your habits, your spending, and how much income is left over each month. Having this data in hand will help you target your goals. It shows you what is possible without much change, or a path toward larger changes.
A budget gives you a sense of the steps you can take to increase savings depending on how fast you want things to arrive at building an emergency savings fund, moving on towards investing, and eventually – time freedom.
Knowing your numbers gives you the power to take the next steps towards an Uncommon Life!