Note: This is the third of a multi-post series that goes into detail on how to set up your first budget. Read Part 1 and Part 2 before this post.
By now, you should have categories and spending associated with each of them. Now we can move onto the guts of what a budget actually provides.
Pick a timeframe to budget. It can match your pay cycle (so you have one paycheck per budget period), or it can match your monthly expenses. My recommendation is to budget once per month, because it aligns with your expenses much better. If you don’t have enough money in your emergency fund to cover a full month’s expenses, start with your pay cycle, and save in a “buffer” category until you get enough to cover a full month’s expenses at the beginning of the month.
Once you pick a timeframe, take your available income for that time period, and assign every penny of it to a category. If you have money left over, put it toward savings or an emergency fund, or something else. If you don’t have enough to cover your expenses, you’ll have to cut back in some areas (or eliminate some of your expenses altogether). Make sure you are spending less than you earn, and give every dollar a job.
Make sure you take semi-annual (such as car insurance) and annual (such as taxes, life insurance, etc.) into account for your budget as well. For annual expenses (as an example), just divide by 12 and use that for your monthly budget. Let the amount build up over the 12 months, and you’ll easily have enough to cover your expenses that don’t occur on a monthly basis.
How should you handle overspending? Again, using software here can help you out. YNAB takes all your overages and simply subtracts that from your total available for the next month. This takes the sting out a little from overspending, which is a good thing. If you overspend by $50 on groceries one month, you shouldn’t have $50 less to spend on groceries the next month. Instead, you have $50 less to spend across all your categories. This is my recommended approach as well.
There is no such thing as a typical month. Budgeted amounts change from month to month. Don’t budget your average expenses every month, and expect a budget to work. That’s one of the common mistakes when budgeting. Each month is different. You can start with an average, then look at what you have going on in the upcoming budgeting period. If you know you’ll be driving more, put more money in gas, and take some out of other categories.
At the beginning of every budgeting period, you should sit down with anyone else sharing your budget (i.e., your spouse) and figure out where you should spend your money for the month. This increases your communication, and builds a stronger, more trustworthy relationship. It also helps to figure out what you plan on doing for the month, as one person might think of something the other missed.
Make sure you save for larger expenses too. Planning on getting a new car in a couple of years? Buying a house a few years down the road? Start saving now by putting a little bit in a category dedicated toward that every budgeting period. This makes saving a LOT easier. It gives you a clear goal on where your money will be spent, which in turn makes you want to save more to accomplish the goal.
Now you know the basics about how to budget your money. There should be nothing holding you back except the time involved in actually doing it. Start today, and you’ll feel a lot more comfortable about your financial state down the road.