A budget is "an estimate, often itemized, of expected income and expense for a given period in the future" (Dictionary.com). Through years of listening to the Dave Ramsey show, I have learned that budgeting is the common denominator for those who call in announcing that they are debt free. Budgeting is essential to eliminating debt and building wealth.
There are multiple budget methodologies out there to pick from, but I (and now my clients) have been successful with zero based budgeting. Zero based budgeting occurs when every dollar has been given an assignment and ultimately your income minus your expenses equals zero. Essentially, every dollar is accounted for and given a purpose each month. This level of intentionality ensures that you achieve your financial goals over time.
I utilize the EveryDollar tool as my budget application of choice. I like this budget tool as it can be used on a web browser and it has an app that is compatible with both iOS and Android. Also, it is FREE. There is a paid version which uploads your expenses from your debit card transactions, but you will be fine if you stay on top of your transactions and don't mind a little data entry. The main reason I use this budget tool over others is that it follows the zero based budget methodology, and it has an intuitive user interface. Also, did I mention it's free?
After you make an initial month's budget in the EveryDollar tool, you can copy that budget over month to month with your set categories. The first one is painful, but after that it is smooth sailing. At the conclusion of each month, I begin to tinker with my upcoming months’ budget in order to hit my financial goals. Here is how I plan out my budget each month:
First, I start with my fixed expenses - These are expenses that I can not cut out of my budget and I rank them in order of precedence in my budget. For example - Mortgage, groceries, electricity, water, gas, HOA, tithing, etc.
Secondly, I review my annual goals. Am I trying to max out my Roth IRA? Am I trying to make additional principal payments on my house? Am I wanting to bolster the emergency fund? This step is to ensure that I am committing my income to my goals before anything else. I prioritize this list and fit in what I can when I can. For example, I may have to pause on extra mortgage payments if I want to start and fund a college account.
Thirdly, I look at variable expenses. These are based on the month or sinking funds that I want to establish or contribute to. For example, if my wife’s birthday is coming up, I need to dedicate $x to this month; or if I am looking to create a sinking fund for new tires to be bought in a couple of months I need to figure out how much I need to set aside each month for this upcoming expense. Looking ahead at these types of expenses will save you from dipping into your emergency fund.
Lastly, is fun money. How much should I allocate to our personal spend bucket? What housing project do I want to work on? These are only in the budget if we can fit them in. Remember the key to building wealth is being intentional with your income, your goals come first.
After the budget has been set for the month, my wife reviews it and agrees to commit. If she notices something out of line or something I didn't account for, then adjustments are made. I am the nerd in our relationship (hard to tell), so I update our transactions on a weekly basis and review the budget as a whole on a Sunday afternoon with my spouse. This is key. The budget is a living document and needs to be continuously updated as no month is the same. I update amounts based on actual spend and re-allocate each week as needed. Pro tip - Wait until all of your expected and unexpected expenses are covered before you pay additional on anything. Personal finance is personal. The steps I take creating my budget are different to those of my clients based on the goals I have set with each of them. Let me know if you need help creating a plan to achieve your financial goals and dreams.