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  • Fabiola Litherland, CPA

Budgeting 101: What is a Good Way to Start a Spending Plan?




Each time you’ve pulled out your credit card this month, it’s bothered you more. This was supposed to be the year for starting a budget, building an emergency fund, and quitting living paycheck to paycheck.


But your New Year’s resolution to take control of your money lasted until the holiday bills showed up in the middle of January.


You’re proud you didn’t entirely give up though. You’ve done a pretty good job of cutting some expenses this year.


But there are still months where you can’t pay more than the minimum on your credit card debt. And that has to change if you want to get ahead.


Why A Spending Plan aka Budgeting Helps


Everything you read tells you budgeting and tracking your expenses is the first step in taking control of your finances. But a 2016 U.S. Bank study reported just over 4 in 10 Americans actually use a budget.


Here are a few reasons budgeting makes sense:

  1. Budgeting helps lower your stress levels because your monthly finances are no longer a guessing game. When you budget, you are intentional about saving and spending based on your financial goals.

  2. If your expenses are greater than your income, you can look at where you can trim your spending and consider ways to grow your income. Can you negotiate your next raise or reduce your cell phone costs? Is adding a side hustle or part-time job what you need to cover your budget gap? Your budget will help you see the difference each change can make to your overall financial situation.

  3. Growing an emergency fund helps to prevent using a credit card or loan against your home to pay for unexpected events. When bad things happen, the last thing you want to do is spend a tremendous amount of interest on the expenses you incur.

  4. A spending plan also helps by providing you the information you need to have talks with those you love about money. Whether it’s your spouse, your kids, your siblings, or your parents – being on the same page about your finances will help you meet your financial goals.

It Won’t Be Perfect, and That’s OK


It can be intimidating to do a deep dive into your spending and try to create a budget. But knowing how much money comes in and seeing where it all goes each month is the first step in effectively managing your finances.


You won’t just be making a list of your bills and checking off when they’re paid each month. To develop a budget, you’ll be looking at your monthly income and expenses.


Do you have a surplus after you pay your bills or isn’t there enough money to cover them?


Once you have that information, you’ll create a spending plan to pay down debt, grow an emergency fund, pay monthly bills on time, and start saving for the future.


This won’t be a one-time event either. Budgeting is an on-going process. But when you keep your end goals in mind, it makes it all worth it!


Budgeting is a skill you can learn, and you’ll get better at it as time goes on.


Set Money Goals


Before you start gathering all your paperwork to begin the work of budgeting, think about what you want from the process.


Paying off credit card debt, student loans, or your mortgage may make your list of money goals. If you owe a lot, just keep in mind it may be a long road. But with each payment, you’re moving in the right direction.


Don’t forget to think about your future too. Finding a balance between paying debt down and saving for your future is important as well. The earlier you start saving for retirement, the longer your money has to grow.


Knowing that working toward your money goals take years, think about setting aside some money for discretionary spending that really matters to you.


You can also consider starting a side hustle or taking an extra part-time job to grow your income.


Spending money on things you enjoy is important but doing it without taking on more debt is priceless.


Six Steps To Your First Monthly Budget


1. Get Organized


The more pay stubs, receipts, bills, and statements you can find, the easier budgeting will be. And don’t forget bills you pay online and electronic bank and credit card statements. If you’re struggling to find the paperwork, estimate the income or expenses as best you can.


You’ll be able to make better estimates of your average monthly spending if you have a few months of records. If you don’t, you may need to make a few more adjustments during the first months of budgeting.


Once you’ve found everything, make two piles – paperwork for money coming in and one for the money you spend.


2. What’s Your Monthly Income?


If you work a regular hourly or salaried position, this should be an easy step. But it’s surprising how many people don’t really know how much money they bring home each month.


While it can be difficult to estimate variable income from commission work, part-time jobs with fluctuating hours, and small business earning – try to make a conservative estimate.


Even though it may not feel like “income” – make sure to include any money you regularly receive such as child support, alimony, or any type of government benefit.


Add it all up, and you’ll have your monthly income.


3. What Are Your Expenses?


Tracking and calculating your expenses may be the most stressful part of the budgeting process. But it’s hard to set aside money in your budget to pay for things if you don’t have any idea how much you spend.


Some of your expenses are “fixed” each month. These are monthly bills that rarely change and may include your mortgage or rent, insurance premiums, and loan payments.


You’ll buy groceries and pay for utilities, but they are “variable” costs that can change each month.


The expenses that aren’t absolutely necessary such as gifts, travel, and entertainment are considered “discretionary” spending.


Add them all up, and you’ll have your monthly expenses.


4. Does Your Income Cover Your Expenses?


You likely knew the answer to that before you did the calculation. If you only have enough money to pay the minimum on your credit card some months, you’re probably spending more than you make.


Cutting discretionary expenses as much as possible is one way to address this problem.


If it looks like you should have extra money at the end of the month and you don’t – you may have missed some of your expenses. Since budgeting is an on-going process, you’ll probably find expenses you forgot when you review your budget and spending for the next few months.


If you do have extra money at the end of the month, what’s your plan for it?

  • Should you increase retirement savings?

  • What about starting a 529 for college for the kids?

  • Do you have 3-6 months of monthly expenses in an emergency fund?

Growing the gap between your income and expenses will allow you to pay down more debt and increase savings.


5. Build Your Budget


It doesn’t matter if you use a notebook, a spreadsheet, or an app like YNAB or Tiller to build a budget – just use something you’re comfortable with.


Start with a list of your fixed expenses, followed by the variable expenses. These cover expenses such as food, housing, transportation, medical and childcare.


Discretionary spending should be at the bottom of your list of expenses. These are your “wants” and not your “needs” – and you can often find places to save money here.


You might be surprised to learn there are a lot of ways to reduce fixed and variable expenses too.

  • When was the last time you called to check on your car insurance rate?

  • Are you using an FSA for childcare to save money?

  • Have you negotiated your rent increase with your landlord?

This all takes time but the saying “time is money” applies here too. Putting in some extra time may save you a lot of money and help you reduce debts and increase savings.


Your monthly budget shows all of your expenses and what you plan to spend on each one. Your income should support your spending plan.


If it doesn’t, you’ll need to reduce spending further or find ways to make more money or you’ll go deeper into debt.


6. Don’t Just “Set It and Forget It”


You might read that automating your finances is key to being a successful saver. But when you first start with budgeting, you’ll want to monitor progress each month by reviewing your income and expenses.


It may seem overwhelming in the beginning, but over time you may even look forward to the time you review your budget; especially as your net worth grows.

If you are struggling to stick to a budget, you’ll need to look at each category of spending. Pay close attention to the “big three” – housing, transportation, and food costs.


If you have a family member or friend who is good with money, this is a good time to ask them to review your spending plan and offer advice too.


Getting Started With Budgeting


Remember the suggestion just to start and not worry if you make mistakes?


It can’t be said too many times. The chance of you “getting it right” the first time you budget is slim.


You’ll learn more from the mistakes you make than from waiting until you have more time or the perfect budget.


Every time you look at your spending plan or add a receipt to a box or an app on your phone, you’re moving forward. Taking control of your money starts when you start the budgeting process.


Accept where you are and be honest with yourself. You and your financial future are worth the effort!



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