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Budget Like a Pro: Mastery Guide

Updated: Feb 11




Want to understand where your money is going?

Do you ever run out of money every 2 weeks or every month?

Using credit cards, payday loans, & pawnshops to make ends meet?

Do you want to align your budget with your vision of the lifestyle you intend to live?


If you answered YES to any of these, then you'll want to create and/or update your budget.


With a budget you can plan for your financial goals and track your spending. The best time to start budgeting is Now! You can't know where you are going without a map or gps, the same is similar in your finances



Establish Goals

The most important thing for budgeting is to establish goals


If you would like to purchase a home, car, plan for your kids college or establish an emergency fund you'll need a budget to track your progress.


Benefits of Budgeting:

  • Helps You Stay Focused On Your Financial Goals

  • Gives Insight Into Spending Habits

  • Provides Information On Unnecessary Expenses

  • Could Potentially Boost Your Credit Score

  • Will Lead To A Happier Retirement

  • Enables You To Prepare For Emergencies

  • Enables You To Track Your Progress To Understand Where You May Want To Make Adjustments In Your Behavior


Jump To Section:




What is a Budget?

The basic financial equation of adult life, 'adulting' - money comes in and money goes out.


A budget is both a way of tracking your flow of money each month and a tool to help you make informed decisions about how to spend and save your money


Building a budget is an exercise to help you figure out your financial priorities, set some goals, create a plan to achieve them, and stay on track.



Why have a Budget?

Most people know you shouldn't spend more money than you have, but how do you know how much is the right amount?


How much are you actually spending each month, and how do savings goals come into play?


There's a lot to know in order to be in control - let's dig in together!





Keeping it Up To Date

If you've already got a budget, you're on the right path!


But a budget is only helpful if it is up to date, so lets refresh that how to budget knowledge, and make sure that your budget really reflects your current financial situation.


Income, Spending, & Savings

There are 3 basic things you can do with your money each month:

  • Earn it

  • Spend it

  • Save it

The first step of building a budget is to figure out where you are with these actions each month. You'll need info about:

  • Your monthly income

  • Your monthly expenses

  • Your financial goals (long term and short term)



50/30/20

When determining priorities and spending vs. saving habits, financial experts recommend you try to stick to the 50/30/20 breakdown.

  • 50% of your money goes towards "needs" spending

  • 30% goes to "wants' spending (aka "fun money")

  • 20% goes to savings


BIG TIP: Think of this strategy as a guideline - depending on your circumstances you may need to adjust or allocate more of your budget to "needs" and that's okay!

Check Out Fidelity's Budget Check Up Tool with the 50/30/20 Method



Top Priorities

Financial experts recommend these are your first 2 priorities when building your budget:


Cover your necessary spending - set aside money to pay your bills and obligations!

Build up your emergency savings - put aside a little money into a savings account each month that you can access if an emergency happens (like a sudden job loss, flat tire or unexpected medical bills.)



BIG TIP: People and their situations are different, so budget priorities will vary person to person, or you may have to re-allocate your savings for example if saving for a life goal or milestone.  New Car, New Pet College, Marriage, Retirement, Children, etc.


Income

Your first step is to know your take-home income each month.

  • Take home income - calculated by taking your total income and subtracting deductions such as taxes, health insurance premiums, and retirement contributions.


Knowing how much money is coming in each month is the starting place for your budget - this is how much you'll have to either spend or save!


Calculate Income

Your gross income is how much you get paid in total (your annual salary for example), but your take-home-income will only be a portion of this.

  • Gross Income - your total income before taxes and other fees are deducted

  • Take home income - calculated by taking your total income and subtracting deductions such as taxes, health insurance premiums, and retirement contributions.


Your take home income is how much you get AFTER everything is taken out of your paycheck - this could include taxes, retirement savings, health insurance premiums, etc.



BIG TIP: Exactly what gets taken out of your paycheck depends on where you work! It ma be some, all, or none of those things!

Determine Take Home

The easiest way to determine your take home income is to take a look at your paycheck, paystub, or income tax form.


To calculate your income from a paycheck, multiply your paycheck amount by the number of pay periods (#of times you get paid each year) to get your annual take-home income, then divide by 12. For your tax form, calculate your adjusted gross income (AGI) and divide that by 12 which should give you a good ballpark figure of income each month minus the taxable deductions. 



BIG TIP: 
Weekly paychecks = 52 pay periods
Bi-Weekly paychecks = 26 pay periods
Twice monthly paychecks = 24 pay periods


Side Hustle

If you have multiple jobs, you'll have to add together the pay from these various jobs to get your take-home income number. This could include a part-time job, babysitting, Amazon selling, freelance work or contact work, income from a side hustle. etc.


If your side hustle is pre-tax (meaning taxes aren't automatically deducted), you'll have to do the math and determine how much you will owe in taxes before factoring it into your monthly take home income.

  • Pre-Tax - money before the deduction of income taxes

Necessary & Discretionary

When we talk about your spending habits, there's an important distinction to keep in mind:


1) Necessary Spending - is the stuff you absolutely need to spend money on each month no matter what. This is usually not fun adulting expenses like rent, bills, loans, utilities, groceries, mobile phone etc.


2.) Discretionary Spending - is the stuff that you choose to spend money on that can vary each month. We like to think of this as your "fun money" - think clothes, dining out, concerts, movies, sports events, candles, happy hours, pet toys etc.


Your Spending

To build or update your budget, you'll need to think about your monthly expenses, meaning all the things you spend money on every month.


One way to make sure you've accounted for everything is to comb through your checking accounts and credit card bills for any monthly recurring costs.


50% Needs

Financial experts recommend that you spend about 50% of your take home income on necessary spending.


This can include rent, utility payments, any insurance not covered by an employer, any loans payments (think student loans, car loan, mortgage, etc.) transportation costs, groceries required purchases or bills for your pet, and more. 



BIG TIP: The recommendation is that 30% of your total income should go to rent (leaving 20% for other necessities) - but this may vary depending on your priorities and what rent costs where you live!

30% Wants

Experts then say that 30% of your take home income should go towards discretionary spending. This is your fun money! Things like shopping, vacation, dining out, a trip to the movies, concerts, other entertainment, and other hobbies.


It is tempting to think that you can be really good about not indulging, but it's definitely better to be realistic than to miss the mark ach month (i.e. if you spend a lot on Lyft, Uber, Starbucks coffee, and/or subscription services, be sure to account for that here.



Savings

Whatever money you have left over that you don't spend - that's your Savings!


You could be saving money for a number of reasons:


Short Term Savings could be for a vacation in a few months, taking a class or course to improve your skillset, or purchasing a new pet.


Long Term Savings could be saving for college tuition, marriage and wedding, a new or used vehicle, a home, or starting a business. 



BIG TIP: Aim to save at least 20% of your income to place toward savings each month.

Don't neglect your savings! It is one of the easier things to control and can be automated if you set your bank to auto withdraw from your checking into your savings account with as little as $5 a week. Slowly increase your savings monthly, quarterly, or yearly and soon you'll quickly realize you didn't need that $10 or $20 here or there. However the impact to your savings will be evident.


Early on money can be tight with just the necessary spending. It's easy to let savings goals take a back seat.


If you are not able to save that much right now it's okay! Everyone's situation is different - just put some thought into what's right for you.



Flexible (But Not Too Flexible)

No one's spending habits are exactly the same each month. Some months may have unexpected expenses, some months you may splurge on a luxury purchase, and some months you may be super good about cooking and saving money.


Your budget is going to need to be a little flexible to allow for these small month-to-month differences.


But, if you let yourself be too flexible, you can wind up spending more than you can afford, or not meeting your savings goals. Think of it like budget yoga - the budget should be able to bend and stretch, but not too much as to break the bank.


Build Your Budget

Once you have all the info about your take home income, necessary spending, discretionary spending, and savings goals, you've already done the heavy lifting of creating or updating a budget.


Manual Budgeting


You can track your budget manually on paper, or and excel spreadsheet weekly or monthly by pulling your accounts, receipts, or statements and tracking your spending. If you perform this manually you'll want to:


  1. Create Categories

  2. Total Up Your Expenses per Category

  3. Create a Nice To Have, Must Have Bucket, & Goals Bucket

  4. Determine How Much You Want To Increase Or Decrease Your Budget From Your "Nice To Have' & 'Must Have' list

  5. Create A Budgeted Amount Per Category: An example of this is spending $1100 for rent and household items. Decrease your decorations to stick within you budget.

  6. When you start realizing you are saving money, allocate those savings to your target goals and take a small amount to reward yourself. I like to reward myself with a $5.99 smoothie. It's rewarding and makes me feel good because I know I'm being disciplined to achieve my goals.


Automated Budgeting


For those that are strapped for time, there are quicker options available. You can use an app or online program that will link to your bank accounts and automatically pull in data and let you create targeted spending for various categories like food, auto, entertainment, home expenses, and healthcare.


We use a free app that the team here utilizes is Mint.com for budgeting, tracking your expense and income, and your credit score. The great thing about Mint is that it provides recommendations after analyzing your accounts on what would be best for your situation. Now some of these are sponsored links on their site or partner offers so decide for yourself if it's worth it to open that new credit card, or shop around for better auto insurance. but there are 7 Best Budget Apps for 2020 here. Some are free and others have a fee.


Making Sacrifices

As you're tracking your budget each month, you may find that things aren't adding up - for example, you're spending more than you're earning each month or you're not able to meet your savings goals. It may be time to make some sacrifices and tweak your budget.


The budget you've built will be a very helpful tool and guide to evaluate th areas of your spending where you can cut back.


3 or 6 Month Budget Check In List

  • Add up needs "spending from past 60 days"

  • Add up your savings from the past 60 days

  • Add up your fun money from the past 60 days

  • Compare your actual spending and savings to your budget goals

  • Decide if you should adjust your budget, or change your spending habits, for the next 6 months.

  • Adjust accordingly

  • Automate your budget with online tools and apps

    • Mint

    • Copilot

    • Rocket Money

    • Monarch Money


Tools & Resources

Budgeting Premium Monthly Budget Planner


Budgeting Course PDF




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Dec 03, 2024
Rated 5 out of 5 stars.

Good information

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