Budgets—making one is a pain and following one feels restrictive, but it’s the only way to truly take charge of your finances. Without a budget, money management becomes stressful because you never know exactly what’s available to spend versus what’s already allocated to bills. You’ll also find it difficult to grow your savings, because saving “whatever’s left at the end of the month” without a budget usually means there’s not much left at all, if anything. Finally, chances are that without a budget you may be spending more than you’re making along with more than half of Americans.

Look, I’m going to be honest, setting up a budget is not fun, and the steps to get started are tedious and time-consuming, but it’s worth it. Budgeting gives you the power of knowledge—knowing exactly what money is coming in and what’s going out, knowing why, knowing you’ll be able to afford an unexpected car repair in six months because you’re preparing for it now, knowing you should say “no” to that impulse purchase this month, but that you can say “yes” next month. A budget means you don’t have to stress out over your finances because you know you have them under control.

Let’s get started.

Find out Where Your Money is Going

Step one is information gathering, so put on your detective hat and get comfortable. Log into all your spending accounts (or gather up your paper statements if that’s more your speed) and export the most recent three months of transactions. Most online banking and credit card accounts allow you to export activity in Excel format. That’s the way I recommend you approach it for this exercise. If you have multiple spending accounts (e.g. one checking, two credit cards, etc.), combine all the transactions into a single spreadsheet.

Now it’s time to start categorizing. Look at each transaction in your spreadsheet and assign a category. The categories you should use really depend on how you want to structure your spending, but try not to be too broad or too specific. “Shopping” is too vague; is that clothes? Food? Home improvement items? On the other hand, your categories need to be inclusive enough that you are able to lump a good number of transactions together and use that category to manage spending moving forward. Differentiating “groceries” from “restaurants” will be more useful for a budget than lumping all food-related transactions into one category.

After categorizing each and every transaction, sort your spreadsheet by category. You probably noticed some trends emerging as you assigned labels to your spending. Total up the spending for each category. I bet you’ll be surprised by how much you’re spending in certain areas. That Starbucks/Dunkin’ habit may be costing you more than you think. Divide the total by three (the number of months you just analyzed) to get your average monthly spending for a category.

What Do You Need to Change?

Now you have the facts. Compare how much you’re spending on a monthly basis to your monthly income. Hopefully, you’re spending less than you earn, including moving money to savings. Most likely, that’s not the case; it’s time to determine where the problem lies.

Look at your monthly average spend for each category and think about where you can trim expenses. Do you buy lunch at work every day? Brown bag it just twice a week to cut the cost of your work lunches by about 40%.

Do you really need Netflix, Hulu, Amazon Prime Video, and cable? Or could you reduce your subscriptions? Is your coffee shop spending costing you more than you thought? It’s budget time. In your spreadsheet, create a new column next to your average spending by category. This new column is your monthly budget. Set a max budget for each category, reducing the dollar amount wherever it makes sense. Remember to be realistic with your targets, though. Your budget won’t do much good if it’s so tight that you can’t stick to it.

Take a first pass at all the categories and see where your total budget lands relative to income. Hopefully, you’ve found yourself a good amount of “leftover” money. Great! Because there are more spending categories you need to add. Your budget should address more than just your regular monthly costs. You want to be setting aside money each month for expenses that pop up irregularly or less frequently. Add budget labels for car repairs, house projects, vacation, gifts/charitable contributions, medical expenses, and any other costs that may come up throughout the year. Planning for that annual family vacation and putting aside money every month means you can actually afford to go.

How should you reflect those non-monthly costs in your monthly budget? Just divide the cost by the number of months you’ll be saving towards it. For an annual vacation, divide the total cost by twelve. Some utilities like trash collection and water are charged quarterly, divide those costs by three to get the dollar amount you should be allocating monthly. And don’t neglect your savings! Remember, you need to pay yourself first by putting a portion of every paycheck into savings.

Now that you’ve added more expenses to your budget, you’re likely feeling the squeeze again. If your monthly expenses are higher than income, you need to take another pass at where you can trim. Ideally, your budget will be slightly under your income.

See it Through

Congrats! Your budget is made. Now comes the test—can you stick to it? Budgets aren’t set it and forget it; your budget needs to be front of mind whenever you make a purchase. A financial tracking program like Mint that you can use as an app on your smartphone or on a desktop will help you see how your spending matches up to your budget.

Be diligent in tracking your transactions. Before making a purchase, check your spending for the month in that category to see if you can afford the expense. After your first month working under your new budget, you may realize that your plan needs to be adjusted in some areas. Maybe you can save more than you projected in some categories, but your budget was unrealistically low in others. That’s okay; adjust where you need to, just make sure your spending stays lower than your income.

You’ve Passed Budgeting 101

So, you’ve created your budget and stuck to it. That’s a huge step toward financial freedom, but it’s only the beginning. You’re not racking up new debt, but how do you pay off existing debt? What should you do when you get a raise? What’s the best way to ramp up your savings and ensure a comfortable retirement? What about developing an investment strategy to grow your assets?

We’ll talk about all of that and more in future budgeting posts. In the meantime, know that creating and following your budget is the most important foundational step you can take.

Samantha Andujar

Samantha Andujar

Sam is a Branch Manager at GOLD. In her role, she mentors and motivates branch staff to reach their full potential and advises Members to help them achieve their financial goals. She finds great satisfaction in playing her part in the team at GOLD and serving our Members.

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