How to Do A Budget – Part 2

In Part 1 of our How to Do A Budget tutorial, we learned that budgeting doesn’t require any high-level math or crazy financial knowledge.

We worked through creating a budget and tracking our spending for a scenario where we had $500 to manage.

Today in Part 2, we’re going to build on those skills and dive into a real-life scenario by doing a real budget for a full month of living expenses, and then spend the money to see how it goes.

Let’s jump in!

How to Do A Budget For a Full Month

Now that we understand the basics of budgeting…

1. writing down items we need and want
2. putting them in priority order
3. and making adjustments as we spend

…we’re ready to put together a real budget and see how it works across an entire month of spending.

As you begin your budgeting journey, you’ll discover that most personal budgets are created for a one-month timeframe.

This is because so many of our bills are paid once a month, such as our rent or mortgage, utilities, car payments, credit card bills, subscription services, etc.

That said, know that you can do your budget however you want. Weekly, Monthly, Quarterly. You get to do what works best for you. Never forget that.

As you wade into technology solutions for your budgeting needs, you’ll now know why most of them are built around a monthly-budget format.

Since a monthly budget does work best for most people, that’s what we’ll use for this tutorial.

Add Up How Much Money You’ll Make

Back in Part 1, we assumed a random amount of $500 to spend.

For a real-world budget, we’ll be using our expected monthly income as our starting amount.

If we get one paycheck a month or multiple paychecks of the same amount (basically a salary), then this is easy enough.

It’s a bit trickier if we’re hourly, or on a commission basis, and our paychecks vary significantly.

If that’s you, you’ll do one thing a bit differently.

You’ll plan your budget using a starting income that is the lowest amount of money you expect to earn for the month.

You’ll do this to ensure you’ll be able to purchase everything necessary even if you only make that lowest-income amount for the month.

If you happen to earn more money, you’ll have extra money to allocate in your budget (we’ll talk more about that below), which is a much better situation than earning less than you budgeted and discovering you can’t pay some of your bills.

For our example, we are going to create a budget for someone who expects to earn $3,500 in the coming month.

Writing Down Our Needs and Wants

Here’s what our $3,500 budget might look like in the real world. ¹

The first thing you should notice in our monthly budget is that I’ve broken out the regular expenses from the occasional expenses.

Regular Expenses

The regular expenses are those expenses that happen every single month.

These regular expenses are the easiest ones to find and write down. We just go back and look at our bank or credit card transactions for the past month and all those regular expenses stick out pretty easily.

Keep in mind, just because an expense occurs every month doesn’t mean the amount of the expense will always be the same.

Utility bills are a great example of this. We’ll be paying an electricity bill every month, but the amount is likely going to be different month to month.

For these expenses where we don’t know exactly how much the total cost will be, we enter our best guess based on bills in the past.

As these bills come in and we pay the actual cost, we’ll have some flexibility in our budget thanks to our occasional expenses.

Occasional Expenses

The occasional expenses are those expenses that don’t happen every month, but we need to be setting aside some money for when those expenses will occur in the future.

Clothing is a great example of this. We don’t need to buy new clothing every month, but we will need some new items periodically as the seasons change or older items wear out.

By setting aside $40 for clothing every month, after 4 months we’ll have $160 in our “clothing fund” to go buy some new clothes.

Saving for future expenses in this manner is often called a sinking fund.

We’re basically setting aside money every single month for a very specific item or purpose in the future.

That purpose can be for needs like clothes or car repairs, or for wants like vacations, travel or larger entertainment items.

Wait! What’s Up With That Oddly Specific $375.12 For Travel?

Ah, yes.

You’ll notice that all of our occasional expenses are budgeted in nice round numbers…except for this very specific number for Travel.

The reason for this is simply because Travel is the last item in our budget.

The reason it’s a very specific number is that our budget has to account for every single dollar that we expect to earn.

That means our spending plan has to exactly equal our total income – in this case, $3,500.

We budget for all of our items all the way through our regular expenses and occasional expenses, and when we add up the total – minus that very last Travel item – we get $3,124.88

If we subtract this total from our income of $3,500.00, that shows us exactly how much money we have left to put into our very last budget item, the Travel fund.

$3,500.00 – $3,124.88 = $375.12

We can choose to spread that $375.12 through our budget however we like, or we can simply allocate it all to the last item on the list.

In our case, we would love to save up a good portion of the money to do some traveling in the future, so we decided to allocate the full $375.12 to our Travel sinking fund.

The key point here is that we have given every single dollar of our $3,500 a very specific job to do.

[Announcer voice] No dollar was wasted in the creation of this budget.

And remember, this list is in priority order.

The fact that Travel is last means that this is the least important amount of money allocated for the month.

If we have to reduce any budget item to make up for overspending somewhere else, it will come out of this Travel category first.

And we’re ok with that. That’s why it’s last on the list.

(If we were saving for a specific trip that had a deadline in 6 months to purchase flights and hotels, then we wouldn’t put Travel at the bottom of our budget. It would go much higher on the list and get a very nice round number allocated to it. Some other item that was less important would go to the bottom and get an oddly specific number budgeted for it.)

What is His Money and Her Money?

Oh, you noticed those, did you?

One of the biggest challenges when doing a budget is experiencing peace and joy with your spouse in the process.

Money is personal, and discussing it with someone else as close as a spouse is going to cause tension. There’s no getting around it.

If that frustration is one of your top reasons for not doing a budget, take a moment to read How to Stop Fighting Over Money.

I share in that post about the importance of partners having more than just money goals, but having a shared vision of the future.

But a shared vision doesn’t mean one size fits all.

Couples are made up of two very unique individuals, each with their own tastes, ambitions, and goals.

Once a couple has a shared vision, then, and only then, are they ready to do the work of establishing a budget that brings that vision to life.

Part of that budget should include His Money and Her Money items in the occasional expenses section.

These are amounts of money that you both agree upon that each person can spend however they please without fear of judgment or hassle.

Many relationship arguments start with, “Why did you buy that?” or “How much did that cost?” or the big one, “Well, if you get to buy that then I get to buy this.”

These are self-destructive arguments that don’t help either person achieve any goals or dreams.

So, instead of fighting with your partner because they spent $55 (or $5 dollars), it’s so much easier to just set an amount of money in the budget that you and your partner can spend however you wish without risking having enough money for groceries or the rent or saving enough in your Travel fund.

I’ve found that just by adding these His Money and Her Money line items in the budget, it eliminates most money fights entirely.

You can even save up all or some of your money each month, just like the other sinking funds, so you have more money to spend in future months.

My wife is an expert at this, always pulling out $100, $200 or $300 dollars in cash from some secret drawer all because she saved some or even all of “Her Money” several months in a row.

I, on the other hand, spend my entire allotment well before the month is over. (Yeah. I’m that guy.)

But those were our choices to make, and we never had to fight about those choices. They were agreed on and in the budget.

If you want a more peaceful existence in your home when it comes to money, stop fighting about money and start fighting for an awesome future together.

Let the Spending (and Tracking) Begin

Now that we’ve got our budget set, we’re ready for the month to begin and to start spending money according to our plan.

Let’s walk through an entire month and see how things work.

Remember, here’s our plan.

Alrighty, after one full week of living on our new budget and spending money, here’s how much money we’ve spent in each category.

As we can see, with some of those big expenses hitting at the beginning of the month (Rent, Car Payment, Auto Insurance, etc.) half our income is gone in the first week of the month.

This would be really bad news if our spending was going to be like this every single week, but because we have a plan, we can see that won’t be the case.

Those big expenses are done for the month.

According to our plan, half our income should be plenty to get us through the rest of the month.

The other thing our budget shows us is how much of our monthly allotted spending took place in the first week, and how we should adjust our spending going forward.

For example, we can see that we spent $157.23 of our $500 grocery budget.

If we spend about $150 every single week, that will be $600 on groceries, which is $100 more than we have budgeted.

This tells us that next week we need to try to spend less on groceries if we want to avoid having to take money away from our Travel fund or other occasional expense funds at the end of the month.

Being able to see things as we progress through the month helps us to know if we need to adjust our spending on any particular category going forward.

That awareness is a huge benefit and will keep us from running out of money early and relying on our credit cards to carry us to the next paycheck.

Let’s Run Through the Next 2 Weeks and See How We Do

After 3 full weeks, here’s what our spending looks like. (New or additional expenses in bold.)

After tracking our spending for 3 straight weeks we can see we’re doing pretty well.

For example, on groceries, we’ve spent $384.81 of our $500 grocery budget, which is good. That leaves us $115.19 for the final week of the month.

Our budget also shows us that both our electricity and water bills were a bit more than we had estimated for, but not significantly so. We’ll be able to handle those overruns easily by putting a few dollars less to our Travel fund.

We’re doing a pretty great job spending our money according to our plan and not going significantly over budget in any particular category. That’s great!

Let’s Finish Out the Month

After tracking our final week of spending, let’s see how well we stuck to our plan. (New or additional expenses are in bold.)

The first thing we’ll notice is that we only spent $2,916.81 for the month, which is well below our $3,500 budget.

The main reason for this is that we knew we weren’t going to spend all of our money in our occasional expenses section.

Those items create an automatic saving pattern for us, making sure we’re living on less money than we earn.

We can also see that we did a great job spending less than our budget amounts for pretty much all categories, except our electricity and water utility bills – but those were just a few dollars over.

So what do we do now that our spending for the month is complete?

We’re Almost Done

We’ve successfully created a budget for our monthly expenses and then lived through an entire month to see how those expenses materialized.

In some cases, the expenses were more than we budgeted for, but we have enough wiggle room created by our occasional expenses section to manage any cost overruns.

Now we’re ready for the final touches.

In Part 3 I’ll show you how to close out the budget for the month and keep track of all those juicy dollars we saved for our sinking funds.

You’re doing great! Let’s keep going.