Budgeting: The #1 most important step to taking control of your finances

Updated: Nov 29, 2020

Budgeting-we’ve all heard the term. But, what is it? Well, let’s start with the meaning straight from Dictionary.com:

In a simpler meaning, it’s income coming in and expenses going out; having an understanding of where your money is going and what it is doing. It is you having control of your finances and properly managing them under your own watchful eye. Ironically, during my time in my undergraduate program at WMU (Western Michigan University) while studying in the Exercise Science program, one of my professors said it best in discussing the subject of calories in relation to maintaining your weight: “It’s really simple, it’s calories in versus calories out”. Although there are certainly other factors that play a role, the simplicity of that statement really said it all. I think it parallels well with the word “budget” when it comes to your finances. “It’s income in, versus income out”. There are obviously a lot of variables at play in everyone’s personal budget and everyone’s financial situation is different, but breaking it down to it’s simplest form allows everyone to thrive.

Now that the meaning of what a budget is has been discussed, let’s talk a bit about budgeting in general. I’m certain that most everyone reading this has heard of a budget at some point in their lives. Some may have a tried and true budget currently, some may not. Additionally, everyone’s current understanding of a budget likely differs. To some it may seem like a tedious task that prevents you from enjoying your hard earned money. To others it may be a vehicle for savings and a way to build for yours and your families future. And even to those that don’t currently follow one, it’s likely something that’s been discussed to save for a large purchase (car, house, etc.). To me, it means Financial Freedom.

Financial Freedom? What the hell does that mean? Well, I’ll dive into that deeper in future posts, but essentially Financial Freedom is a point in ones life where an individual or individuals (family) has sufficient wealth to live freely without the need of employment (your standard 9-5 job for example). In its simplest form, financially independent people have assets that generate income that at least cover their expenses. Again, I’ll cover this in more detail at a later time. However, I wanted to discuss that briefly so that you can understand just how important gaining the concepts and knowledge of budgeting can be to providing the blue print for taking control of finances, which can in turn lead to a financially successful future through the creation of wealth.

First, a few questions. What do you think of when you think of budgeting? Do you have to be rich to budget? Of course not. What if I live pay check to pay check? More reason to budget. Budgeting doesn’t need to be a drag. It’s fun. Now, let me show you what I mean.

Back to my story about counting calories. I’ve done that somewhat casually over the years. Basically, estimating throughout the day, allowing me to know what I am taking in, which I could then in turn estimate my expenditures (calories burnt during exercise), to maintain a happy homeostasis (equilibrium). This has allowed me to keep my weight where it needs to be, so I can stay fit and in control of my health. Budgeting is essentially the same process.

Let’s start with what a budget looks like:

Now, I know everyone’s budget looks different. However, I created the above example to give an idea of what a “standard” budget may look like. Budgets can be created on various mediums, with something as simple as good old fashioned pen & paper, to excel spreadsheets, to a slue of budgeting apps and programs. I personally use “GoodBudget” on my phone. It’s free, easy to use and it’s something I can update easily and quickly on the go. At the end of this blog, I’ll provide a list of options/ways to track your budget. Next, let’s dive into the Income Field.

The Income part of it, to me seems the easiest to compile. Typically, there are many less fields to complete here versus the “expense” column. For simplicity sake, let’s refer to my example budget above as I discuss the meaning of each category. First, you need to account for your monthly income. The best way to do this is to grab a paycheck. I should preface by saying “be conservative”. What I mean by that is, don’t overestimate your income. It’s better to have a little extra, than to short yourself. If you are paid weekly, bi-weekly (every 2 weeks), bi-monthly (twice a month), monthly, etc., it doesn’t matter, just be sure to calculate your monthly total and put that in your income field. Make sure to put your “Net” as opposed to “Gross” earnings. This would be the amount after all tax deductions, 401K contributions, benefit premiums, long/short term disability deductions, etc. Now, if there is a second earner in the family, do the same for that individual (ex: husband & wife would be dual income generators). Lastly, put down any additional income you earn. This can be additional money you make from a second job, side hustle, overtime, bonuses (monthly, yearly, Christmas), etc. Tally up all fields. This is your monthly income.

Next, let’s take a look at expenses. Everyone’s budget has various different expenses, so be sure to make a list and check it twice (quote from Santa). Expenses can vary from monthly, to quarterly, to yearly, etc. You get the idea. A few examples: Groceries would be a monthly expense. Car Insurance for example, could be monthly, semi annually (paid every 6 months), etc. What I like to do for expenses like Car Insurance is to take the total amount spent per year on this field and divide by 12, so that I am accounting for this expense on a monthly basis. Example: Let’s say your car insurance is $2,400 for the year. Divide that by 12 and your monthly expense is $200. Put that number down in the Car Insurance field.

Now, I want you to take a look at my above budget example. You may have noticed something interesting in the first field of my example: “Saving”. This is the number one most important expense. This category deserves the most attention.

For those of you that have or haven’t read the book “Rich Dad, Poor Dad”, I highly recommend it. In the story, Robert Kiyosaki speaks of paying himself first, before any creditors. This may seem like a difficult concept to take in, but it is extremely important. I do this myself. I pay my credit card on the last possible day before it is due and I pay the monthly balance in full (there’s no way I’m paying 22% interest or whatever mind boggling rate my card has). Additionally, I pay my mortgage as late as I can. It’s due on the 1st, but anyone that has a mortgage, knows that the real due date isn’t until the 15. Wait until then. This allows you to keep cash on hand longer. Your bank accounts and investments will appreciate this, especially if you have a Money Market with a 2% interest rate (https://www.nerdwallet.com/blog/banking/best-money-market-accounts/). Long story short, make sure to account for this field!

Next, add up all of your expenses besides your “savings” section. Whatever you have extra, put in this section, so that both columns are equal. This provides a starting point.

Now, let’s go over some examples. Again, everyone has different situations. There are single generating income families, dual generating income families, DINK’s (Dual Income No Kids), etc. I think you get the idea. For my example below, I’m going to use a dual generating income family, where each spouse makes $50K annually and has additional income of $5K a year (from overtime, bonuses, ect.), living in Portage, Michigan.

A little background on the numbers so you can see where I got them. First, for the income, we are of course calculating net income. I included 401K deductions of 3%. You will most certainly at least want to contribute this amount, especially with an employer match. We’ll get into 401Ks at a later time. Also, I included a rough estimate of monthly health care premium costs for a family of 4. Keep in mind in this scenario that pay checks are bi-weekly. What this means is that twice a year, you will be receiving 3 pay checks per month. You know what that means? Your savings section goes higher that month. That’s good news. For the “additional income” section, I based a total of $5,000 gross additional income dollars earned between the couple throughout the year. This can be through overtime, bonuses, etc. for example. I calculated $3,200 as the net amount and divided by 12.

Now, let’s look at expenses. I based the mortgage on a $200K home in Portage, Michigan. That’s where a lot of my readers are from. If you’re in Colorado or some other parts of the country, you most certainly know that number is laughable. In any scenario, your own number will certainly fluctuate, but I wanted to use something reasonable for this example. I based the interest rate on 4.5%, with a 20% down payment. Again, the mortgage number would fluctuate if you provided a larger down payment, or smaller (and PMI was included for example).

I indicated a car loan of $250/month. Some families may have multiple, while others may have none. I personally recommend not having one EVER. We’ll touch on that later as well. I put car insurance at $200 per month. Groceries at $500. Gas at $200. Cell phone at $150 (let’s assume the little ones don’t have them). Cable/Internet at $75 (this is likely to vary quite a bit based on your package, provider, etc.). If you have a DirectTV package with every possible add on known to man, along with the highest speed of internet on planet earth, your number will most certainly be higher. If you have Netflix and no cable television for example, along with a basic internet package, you may be spending $40 per month ($30 for internet, $10 for Netflix). I indicated Student Loans to be $600 per month. This will most certainly vary based on the individual/individuals, but I wanted to again go with something realistic and not too low. Miscellaneous-this will include essentially all of your discretionary spending for the month. I like to include anything fun I might be doing for example (trips, dates, etc.).

For utilities-electric, gas, propane, water, sewer etc., I put $200 (probably on the high end, but it’s important to put a good average here to account for air conditioning usage in the summer & heating costs in the winter). Car Repairs/Emergency-$300. This is a very important field. Don’t assume everything will go right, because it won’t. I know first hand, because we almost had to shell out $30-50 grand unexpectedly for a new water well (luckily we didn’t have to). The point is, it’s not if things will pop up, but when. You need to be responsible and prepare for them. By putting them into your budget, you are doing that. Lastly, but again, most important is the “Saving” section. After deducting all expenses for the month, there is $1,371 remaining in this example. We’ll discuss techniques and ways to increase that, but that very important section is your financial freedom. What you do with that money plays a very important factor in taking control of your finances, establishing a strong retirement account and setting yourself up for financial success.

Now, if you’ve followed along and jotted down your own personal budget, you might be surprised to see how much is available in your “saving” section. First, you might be underestimating on some categories. One likely culprit is the “miscellaneous” field. However, not to worry. This is where the importance of budgeting comes into play. When I first started really “budgeting” and what I mean is tracking my spending, I began to really realize how much i was spending in that category for example. I have generally not been a huge spender to begin with, but I too was surprised how much I was spending on unnecessary items. Things like “amazon purchases”, restaurants (we’ve never been big on this, but it still adds up), home decor, etc.

Tracking your spending allows you to consciously think before you buy something. For example, every time I make a purchase, I know I have to enter it into my budget app on my phone. This allows me to be more careful before I buy something. I’ve noticed that I have drastically reduced spending by implementing this. Additionally, this allows you to not make impulsive purchases. When you see that you just dropped $150 bucks on a pair of concert tickets for example and that, that purchase alone dropped your miscellaneous spending section down to only $350 remaining for the month (from the $500 you started with), you’re able to make a smarter more informed decision before making that buy. This isn’t to say you shouldn’t have fun or “splurge” every once in awhile. Just as with a diet, you need a little leeway and freedom once in awhile. But, it allows you to make smarter decisions.

Back to the savings section. As discussed, we will go into this this in more detail in the future, as growing this will allow you to reach financial goals quicker. However, I want to touch on this briefly and provide a few simple ways to increase this category. First, there are two general ways to increase this bucket. Can you guess what they are? If you said “Increase Income” and “Minimize Expenses”, you’re right. Well, how can you increase income? There are a multitude of options, such as a second part time job, a side hustle (dog walking, driving Uber/Lyft, Amazon Seller, etc.), picking up overtime at your 9-5 job, etc. You get the idea. And, on the flip side, you can minimize your expenses by finding ways to decrease each category as mentioned above. For example: we used $500 as a monthly grocery budget for a family of 4. Perhaps, that number can be cut down to $400, through utilizing some couponing techniques for example (expect a blog on this). Or, reducing fuel usage by biking or walking more frequently if you’re able. Or, cutting the cord (getting rid of that unnecessary cable TV), refinancing your student loans (if they are variable rates, or a slightly higher fixed rate for example), getting rid of a car payment by buying a used vehicle, or reducing your utility bill by keeping your heat temperature a little lower or not utilizing your air conditioning as often (opening windows instead). These are all examples, but I think it’s fair to say that most any of these categories can be reduced with a few small (or big) changes.

Of course if your income increases or expenses decrease, your savings rate is going to increase. That means more money for you to invest, save, etc. That is called being fiscally responsible. That my friends, is budgeting. I hope you enjoyed this article. As always, please comment with any feedback (positive/negative). Additionally, if you ever having any questions and want to send a private message, feel free. I’m more than willing to help and provide feedback/thoughts on your own personal situation.

As promised, here is a link to some of the best budgeting apps currently available. Again, there are tons on the market, from free options to those that charge a small monthly fee (be sure to include that in the budget!). Creating one via pen/paper or Excel is certainly an option as well.


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