If you are just tuning in to this money series,
Click here for an overview of what this series is about and what it will contain.
Click here to read why it's so important for every dollar of income to have a name before it is even earned.
Click here for a break down of what bank accounts Trent and I have and how we use them effectively.
Click here to learn why a monthly budget is a terrible idea for a lot of people and what I recommend instead.
Ok, now back to business. It's time to build a budget. For this, you'll need the list of names you gave to all your dollars you spend, which we talked about and created within this post. That is going to become the backbone of your budget. So either go find that list or go back to that post and create your list.
Now, let the budgeting begin.
I have created a completely fictitious budget template for this post. It doesn't have many expenses in it for the sake of being able to see the whole thing in a screenshot and also not overwhelming you on first glance, but it will still get all the main points across. Click here to access a free template of the fake budget we will be looking at!! Yay, free stuff. Please copy that template to your own Excel or Google Docs file, then have at it and make it your own. Or if you want to start from scratch, you can just look at it for guidance. The final product of this fake budget looks like this:
HOW TO CREATE A BUDGET
Part 1: Budget Periods
This part is easy. All you have to do is designate your budget period (as discussed in this post), then look at a calendar to designate the correct dates for each chunk of time across the top of your budget spreadsheet. We track ours based on two week pay periods that begin every other Tuesday with my payday, so I just stuck with those dates for this pretend budget template. Make sure to leave two columns at the left of your spreadsheets before you start inputting the dates. We'll need those later.
In all of the discussion from now on, please remember we are talking about pay periods here, not months. (Unless you are paid monthly and budgeting based on that.) So when I talk about deciding how much to put in savings or give to charity, for example, think pay periods, not months.
Part 2: Income
This next part isn't hard either. Since we are breaking this into budget periods based on pay days and based on cash flow timing of income, you just need to input what your income is for each budget period. If this budget is for one person, it's a no brainer and you just need to plunk your net paycheck amount into the income box. If for a couple, just add both paychecks together. If you wanted to, you could separate out each paycheck onto separate lines and name them accordingly.
If you get a raise, bonus, overtime pay or (heaven forbid) a pay cut, you can just adjust the individual cells as needed. Note that I put net take home pay in this part. I have 401K, taxes, benefits, etc that come out of my check before I even see the money, so I let that take care of itself and start our budget with the actual amount that hits our bank account. Or, if you are like Trent and have no benefits, same thing. You only have taxes coming out of your paycheck and you still just need to put the net amount of income in your budget.
Part 3: Giving & Saving
There is an element of discretion and decision making to this part, so it's not quite as straight forward. I do believe in the importance of giving to worthy causes and maintaining savings, but I am not here to tell you how much to give or save. That is up to you. Once you have decided that, you are back to easy steps. Just plunk those number into your spreadsheet.
Notice that I've got these two items at the top of the budget, right under income and at the beginning of what will be the expense and cash outflow section. I believe putting them at the forefront signifies their importance, gets them a little more attention as you are actually setting up money to pay out and makes them a little less negotiable or ditchable when money gets tight. Or maybe that's just me.
Part 4: Recurring Monthly Expenses
If you followed along during the Every Dollar Has A Name post, you've already got your list made of your typical expense categories and amounts to go with them. This section here is for the recurring monthly expenses, aka BILLS. Mortgage payment or rent, utilities, phone, cable, student loan payments, car payment. For this section, order these bills according to the day of the month they are due. In the left-most column of your budget, enter those days (1st, 14th, etc). To the right of that, just put the name of the bill that corresponds with that due date. Name them whatever you want, technical or nickname-ish, just make sure you know what it refers to. Include every monthly bill, even if it is small (like Netflix below).
Now for the amounts. You need to input the amount due in the budget period when it falls due. For example, below it shows "House Payment" is due on the 1st of the month. I would not input it in the 1st budget period shown below because there is no 1st of the month in that period. It will go in the next period. Don't automatically input it in every other period. Though that tends to be what ends up happening, you'll end up with some months that have three paychecks and you may go two pay periods before hitting the 1st of the month again. See April below.
Ok, now just stare at this example for a bit so you understand everything I just said...
Notice I put a line item in there called "Car Extra" and it doesn't have a day of the month next to it. If you are trying to knock down some debt, you'll need to pay more than minimum payments. Add lines as needed under the debt item you are tackling. There really isn't a due date for extra debt payments, you just pay them whenever you can. We'll talk about this a bit more later in Part 7.
Here's a tip for bills that are not the same amount each month, like utilities. I go ahead and enter an estimate of the bill in the cell where it goes and I turn it blue. A blue cell means "That is only an estimate, for the sake of forecasting and planning the big picture of this budget". When I get the actual electric bill or water bill, I change that cell to the actual amount due, hope it was close to my estimate and then remove the blue coloring in the cell. That then signals that it is now an actual amount due.
Still hanging with me? I told you this would be long. Feel free to take a break and come back if you want, but make sure you come back!
Part 5: Ongoing Life Expenses
Alrighty, this part is less cut and dry and may require some massaging over time to get into a groove and plan that works for you and matches what you actually tend to spend and need for these categories. This next section is for regular ongoing life expenses like gas, groceries, eating out, coffee, etc. Yes, I included coffee. This may seem like a stupid thing to include on here, but if it's something you regularly spend money on, it needs to go on here. We have a line item in our budget for coffee. For you it may be Dr. Pepper or hair dye. Nobody has to see your budget, so if you have a guilty pleasure item that you are ok with spending money on, put it in the budget.
These amounts need to be present in every single budget period. Remember we are working with pay periods here and are now talking about ongoing life expenses, not just monthly bills. To get this really nailed down, track how much you spend on these things for a couple pay periods to see what your budget should reasonably show in order to cover the needed expense. Then you can generally populate each budget period with the same amount. Sometimes you'll have flukey budget periods where something will be higher or lower. That's ok, plan for it and put it in the budget. An example is one period where you know you are headed on a long drive to visit parents. Up your gas spending for that period and throw a note into the cell so you know why it's different.
I include a line in our budget called "Blow Money". This is literally just cushion in case we blow the budget or something comes up that we didn't account for.
The reason Coffee and Eating Out are highlighted green above is because those are two items that could be treated as cash items. If you really need to reign in your spending on an item, go to the bank on pay day and pull out cash for that category and only allow yourself to spend cash on it, not debit or credit card. Handing over a $20 and seeing the hole it leaves in your wallet will make you realize how much you are spending and you can easily see how much you have left. When it's gone, it's gone.
Part 6: Big Ticket Items
This is sort of a catch-all line item for things that pop up sometimes and, if not planned for, could totally blow the budget for that period. Examples: medicine for pets (expensive!), oil changes (if your car is like mine and they are pricey), vehicle registrations, small vacations or special outings.
If you can see enough into the future to plan for these things (you know when your car registration runs out or when the pack of flea meds runs out), just put the approximate amount for that item in the appropriate budget period where it will need to be paid for. Done. Accounted for. Taken care of.
The bottom part of the budget simply shows what you've got leftover at the end of the budget period or how much you are negative, indicating you might need to tweak some expenses. It also allows for a carryover of money from one income heavy budget period to an expense heavy one. These totals are also helpful for determining how much money you can pay to extra debt payments. I just use a subtotal called "Total Expenses", then use a formula to take Income - Total Expenses and get to a Net number. Then subtract a carryover to the following period, if any, to get to your true Net.
There is a formula in the "C/O From Last" cell at the top of the budget that automatically pulls in any "C/O To Next" from the previous period and counts it as "income" available for use. So we have fixed the deficit in the second period. Yay! I recommend having some sort of Holding Account as described in this post, where you can temporarily stash this carryover so you know for sure it won't get used up in the first period. Then transfer it to your bill paying account (also described in that post) at the beginning of the second period.
Now, we still have the $567 net leftover in the first period. Figure out what cushion you want remaining at the end here and enter the rest to extra debt, to savings, or somewhere useful. Don't just say "yay, I have extra money this time" and spend it away on who knows what. Give every dollar a name. In this example, I came up with $510 that could go to the "Car Extra" line, so that is where I put it. Now, we're back to a reasonable amount of "net" leftover and everything is good in the neighborhood.
That's it! We're done! Did anyone actually make it this far is this beast of a blog post? If you did, I applaud you immensely and thank you for your interest. I hope this was enlightening, helpful and not too mind numbing.
Questions? Comments? Need more explanation on some part of this? Comment below and I'm more than happy to respond. Now let's all go rest our brains. I'll be back soon with Part 2 to talk about how to maintain and actually use this nice budget spreadsheet.