How to Do A Budget – Part 1

What is a Budget?

A budget is simply a plan for how we are going to spend our money.

That’s it.

I know, I know. You probably feel like there should be more to it than that, but there really isn’t.

Sadly, many people assume budgeting requires some higher-level math nerdery based on an advanced degree and extensive knowledge of complex financial principles.

It doesn’t. At. All.

If you can make a plan to spend the weekend at the beach, you can make a plan for how to spend your money.

Let me show you.

How to Do a Budget in 3 Easy Steps

Let’s say we’ve got $500, and we need to make a plan for how to spend this new money.

We can spend that $500 to buy one thing, or we can use $300 to buy something and $200 to buy something else.

Or we can buy 5 things that are $100 each.

There are literally thousands of combinations for how we can spend those $500 dollars.

But we don’t need thousands of plans. We only need one spending plan that meets our needs.

And that brings us to step number one.

Step 1: Write Down What We Need and Want

Every budget starts with creating a list of our needs and wants.

This step is generally pretty easy. We generally know what things we need, and we definitely know the things we want, so just write them down.

Let’s say this is our list of needs and wants for our $500.

And that’s it. We just completed step one of how to create a budget for our $500.

No high-level math. No complex financial nerdery. If we can do addition and subtraction, we’re in the club!

Step 2: Prioritize the List

When creating our budget, we have to prioritize how we are going to spend our money.

It would be foolish to spend our last $50 going out to dinner, then run out of gas on the way home.

Spending money to put gas in our car should generally be prioritized higher than spending money to go out to dinner.

So let’s go back to our list and put things in priority order.

Here’s the budget again, rearranged in priority order, with some example reasons for why we prioritized items the way we did.

At first, it might look foolish to put New Headphones as the most important item on this list.

But let’s say we work in the music business and the headphones we’ve been using for the last 5 years broke and we need a new pair before our upcoming music session.

Since headphones are critical to do our job, it starts to make sense why we put them at the top of the list.

Budgets are often extremely unique like that.

My plan for how I’m going to spend my money may look completely different than your plan, and that’s ok. Neither of us are wrong. We just have different priorities.

But this is why it’s very hard for other people (or an app) to manage our money for us. We have to be the ones making the decisions.

Others can create a framework for how to to do a budget. Others can even create a tutorial (like this one) teaching people how to do a budget.

But only you can actually make a plan for how to spend your money.

Alright, with our list prioritized, we’re ready for step 3.

Step 3: Spend the Money and Make Adjustments

For steps 1 and 2, we haven’t actually spent any of the money yet.

All we’ve done is create our plan for how we are going to spend the money while it’s still in our pocket, or bank account, or even still on its way to us.

This is part of the magic of the budget. It gives us a very real picture of what our spending is going to look like before it even happens.

But now we’re ready for Step 3, which is to go spend the money and make adjustments.

Make Adjustments? But My Budget is Perfect!

Hahaha. No it isn’t.

No budget is perfect.

Let’s take a look at our budget again real quick.

Wait a Second! Things Don’t Cost Nice Round Numbers

Bingo!

While I would love to live in that beautifully fantastical world where every price ends in a zero and math is a lot easier, that’s not the world you and I inhabit.

Here in the real world, we know that with tax and such our totals aren’t going to equal nice round numbers.

We created our budget not knowing exactly to the penny how much things were going to cost.

We created our budget with our best estimates – and that’s perfectly ok.

More accurately, it’s perfectly necessary.

When we create our budget, we do some research and enter an educated guess at how much things will cost.

But as we start spending money, we will have to make some adjustments to our budget along the way to account for the variations from our original estimates.

This isn’t a sign of bad budgeting, it’s a basic part of the process due to the fact that we live in the real world. ¹

Spending money and making adjustments along the way is all part of the plan.

Let’s start spending our $500 and see what happens.

As we leave the grocery store with our half-gallon of Ben & Jerry’s Ice Cream Sammie, we can see each item ended up costing a bit more than we had originally budgeted.

Looks like we even splurged on that gift for mom, but she’s totally worth it, right?

In total, we’ve spent $419.92 so far, leaving only $80.08 left of the original $500.

Our original spending plan included us spending $48 to put gas in our car and $79 to treat ourselves with a massage. That’s a total of $127.

Uh oh! We don’t have enough money left to spend what we had planned on those last two items.

And this is why prioritizing our spending is so important.

We bought the items at the top of the list without any issues, even if they were a bit more expensive than we originally budgeted for.

But the items at the bottom of our list are the ones that suffer because as our money starts to run out, we may not be able to spend as much on those items, or may not be able to buy them at all.

If those headphones are critical for an upcoming recording session, and we put them at the bottom of our budget, that could leave us in a position where we run out of money before we get a chance to buy them.

But instead, we put our massage at the bottom of the budget.

This is a much less important item and having to skip it won’t jeopardize our ability to make our recording session.

By prioritizing our spending in our budget, we make sure that we have enough money for the critical items, and the less important things can be reduced or skipped if the money starts to run out.

A solid money plan – a budget – always puts spending in priority order.

Adjustment Time

Looks like after we fill our car with gas, we might have to opt for a cheaper, shorter massage, or just skip it altogether.

Or maybe we only fill our gas tank halfway and keep our massage appointment as is.

Or we return the gift for mom and say – oh wait…bad idea. We’re keeping mom’s gift.

The point is, there are lots of ways to make adjustments depending on what’s most valuable to us.

By putting our spending in priority order, we’ve made it easier to know where to cut if something has to go, but we also have the freedom to cut in other areas if that makes more sense in a particular situation.

Like if mom starts getting lippy right before her birthday, you know. Things can be adjusted accordingly. ²

We Did It!

And that’s it!

We just made a budget for $500, then spent our money according to that plan.

We even tracked our spending and made some adjustments along the way which was all part of the plan to make sure we only spent $500 and not a penny more.

Now we’re ready to take our skills to the next level.

In Part 2, we’ll create a budget for a full month of regular household expenses, then spend the money week by week.

We’ll watch our spending and discover exactly why a budget is a very powerful tool for managing our money.