How to Create a Budget?

If number crunching is not your passion and excel spreadsheets with all the unknown functions seems more like a horror movie then you are probably up for a not so fun Sunday night spent budgeting. Well, at least that’s the impression for most people when starting their first budget. But it doesn’t have to be the to-do list task you are dreading. I am here to tell you about multiple budgeting options, budgeting mindset (Part 2) and fintech options (Part 3) that can help you achieve your budget goals.

My Journey

I have to admit budgeting for me was a trial and error game. And why so? Because I believe budget is not a “one size fits all” plan. I spend a large part of my day in excel spreadsheets (learning new and valuable functions in excel is my type of fun). Though budgeting in a spreadsheet seemed as too much hassle for me. I spent my time improving and adapting the file to my liking, creating graphical visualizations and setting my limits but never was fully satisfied with it. In terms of reaching my goal of controlling my expenses and savings rate- I did it. But the execution part… not perfect.

And yet, here I am telling you how to create a budget. I feel obliged to tell you that spreadsheet is not the only option.

Where to start?

Before trying any of the methods below you must determine your shopping and expense trends. Go through your bank account statements and write down your cash expenses for at least a month.

Next up, create categories. At least 80% of your expenses will be fixed costs that are taken up by the categories as:

• Mortgage/Rent
• Groceries
• Utilities
• Internet
• Phone
• Cable
• Auto loan
• Gas and car maintenance
• Etc.

The last 20% might be some variable costs as dining out, new clothes, leisure and entertainment costs ( honestly, all necessary, also highly adjustable).

The benefits are: 1) You’ll identify your biggest cost centers; 2) You might discover eye-opening lifestyle expenses (that was the case for me. And provided me a fast increase in savings as they could be cut off without flinching an eye).

When you’ve done your homework, let’s get to your goals. Your budget must correspond to your financial goals. If you want to save 5000 EUR by the end of the year, your monthly savings should be 416.67 EUR/month. Plan that straight away after your fixed costs are covered.

There are at least 3 personal finance rules I’d suggest to keep in mind:

1. Earn more than you spend;
2. Never borrow money to invest;
3. Save when you’ve paid for the roof over your head.

And now, it’s time for the long-awaited task (drum rolls in the studio): CREATING A BUDGET.

Budgeting Methods

There are a hard-die fans for each of the methods listed below. Though, don’t stress if the first method you try isn’t “THE ONE” for you. I’ve gone through similar experience. Not fun, but not the end of the world as well. Keep pushing and trying and I believe at least one of these will work greatly for you.

From my perspective, I base all of these methods on the zero-sum budget principle. Meaning, every dollar has a job assign. If you’ve ended your month with 300 EUR surplus, increase your savings or payoff part of the debt, but there is no money laying around to be carelessly spent.

1. Pen and paper

If you have any arguments on why you can’t budget then this method denies them all. Also, it can be used parallelly with almost all the other methods. Whether you are considering putting limits on your categories or general expenses, this will easily let you to check up on your financial health wherever you are.

PROS: Good for people on the go and bullet journal lovers

CONS: Template creation and follow-up is more time consuming

Additional resources:
Money under 30 blog post on analog budgeting

2. Good ol’ spreadsheet

As you already know, this wasn’t the method for me. You have to be meticulous for this to work. The method is similar to the one above. It will usually include automatic categorization from your bank statement export and more visual charts on your spending habits (it’s nice to see the graphs on where your money goes. That’s actually what drew me to this approach at the beginning).

PROS: Usually is automated to categorize your bank statements, can account for your every cent

CONS: Time consuming, requires basic knowledge of spreadsheet functions

Additional resources:
Microsoft Office offers many free personal budget templates, check them out!
Free budget template with financial snapshot from Budgets are Sexy

3. Cash envelopes/Digital Envelopes/Seperate accounts

By now you’ve identified all the expense categories and have set the limits that works together with your financial goals. All your expense categories then can be put literally in separate envelopes that can be used for the specific purpose.

For example, you have a separate cash envelope for food, gas, beauty (when beauty sleep alone doesn’t cut it), entertainment. So whenever you go grocery shopping, you use the cash in the “FOOD” envelope. Therefore, it will be easy to keep yourself accountable for all the shopping you do.

You can do the same with either creating a digital envelopes or separate debit accounts for each of your expense category ( if that does not incur any additional bank charges).

PROS: Easy to be accountable, easy to adjust monthly, tangible budget

CONS: cash operations, starting can be confusing

Additional resources:
The founder of the envelope system Dave Ramsey’s blog

4. 50/30/20 rule

Harvard bankruptcy expert Elizabeth Warren, named by the Time magazine as one of the 100 Most Influential People in the world together with her daughter Amelia Warren Tyagi developed 50/30/20 rule for spending and saving. The preconditions in terms of knowing your expenses still applies. But your after-tax income is divided between 3 categories:

1. 50% goes to cover your needs- rent/mortgage, groceries, utilities
2. 30% covers your wants- hobbies, dining out
3. 20% is your savings or paying down your debt.

If you take away all your “wants” and it’s still not enough to cover your “needs,” it might be time to downsize or start earning more.

PROS: Simple, easy to determine your expense limits, easy to adjust to any income amount

CONS: Not specific enough, thus might be hard to follow up on your spending habits

5. 6 JARS System (by T. Harv Eker, the author of the Secrets of the Millionaire Mind)

Both 50/30/20 rule and 6 JARS system focuses on the habit of managing the money not the amount and that’s the main reason why I love both of these systems. As the name claims this money management system uses 6 accounts or actual jars.

1. 55% goes to cover your necessities.
2. 10% are for long-term spendings, for example, large purchases and emergency fund.
3. 10% is your play account: leisure, spoiling yourself and your family.
4. 10% goes for your education: courses, mentoring, books. To increase your income you need to study and grow. This is the fund for your future growth.
5. 10% is your financial freedom account for investing and passive income creation
6. 5% is for giving. To receive, you must also give! And that’s one of the reasons I love this approach.

PROS: Simple, Easy to adapt to any income amount, cover all aspects of life, long-term habit creating

CONS: The categories might need to be adjusted for your lifestyle

Additional resources:
The author of the Secrets of the Millionaire Mind, T.Harv Eker’s Blog

6. Automatic budgeting

Automatic budgeting lets you manage your money while not thinking about it. All the invoices and accounts are managed and paid automatically. Though to do this you need a bank with a robust online banking system and with an option to create sub-account for free. Your task is easy. All you have to do is set up all the invoices to be paid automatically, in addition to the payment to your savings account.

Remember all your fixed cost categories? Most of these can be automated. So no more payments past due date and less headache at the end of the day!

PROS: Simple

CONS: Needs a robust online banking system or app

Final thoughts

The methods provide you a guideline on how to create budget. Yet, most of them can be easily adapted based on your requirements and mix-and-matched.

Though creating a budget is just a beginning. You have to remain within your financial mindset especially when you are budgeting (I’ve fallen in the trap before) and remind yourself to be rewarded.

Hope this helps you to get started on your budget and gives enough resources to excel in this!

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See you soon on part 2 of this post on how to have the right budgeting and financial mindset!