How to Create a Budget

Note: This article highlights our strategy for creating a budget. If you want a more personal version that includes reflections throughout our own process and how using a budget has impacted us personally, then check out this article: How We Use Our Budget to Maximize Travel & Spend Intentionally. There is some overlap between the two, but this one is instructional rather than personal.

Tips for creating a budget

1. Create a tracking system that works for you. It could be a spreadsheet, an app, a physical paper, or something else of your choosing. As long as you’re going to use it.

 2. Look in your bank account and figure out how much money you make each month. Look in your bank account because the only money you should be concerned with is what you have to spend. Don’t be concerned with the amount you make before taxes and health insurance or whatever else is taken from your paycheck, because that money is already spent. Put the total of what actually comes into your bank account on a calculator to subtract from as you add new items to the budget, and record it somewhere on your tracker for reference.

3. Find all recurring monthly expenses and add them to your tracking system with their amounts. Examples are Mortgage/Rent, Student Loans, Cable/Internet, Car Payments, Dog Food, and Car Insurance. For some monthly subscriptions, you can choose if it will be its own dedicated category or if it will be taken from somewhere else. For example, Hulu may have its own category if everyone in the house uses it, or it might go into a broader “entertainment” category, or maybe it comes out of your miscellaneous spending because you are the only one that uses it. Take the time to be sure whatever you choose makes sense to you. This may prompt you to discover subscriptions you forgot about, so get rid of ones you don’t need. Subtract all of these amounts from your total on the calculator once you’ve input them to your tracker.

4. Research your utility and grocery spending. For utilities, find your most expensive month of the year for each category and set that as the amount. This prepares you for when you hit the highest all in the same month, while also giving you some extra unused cash when utilities are low but another category is over-budget. For groceries, tally up each month and either find an average or go with the highest month. Your call. If you can’t research on your credit/debit card statements, then track the spending for the next week or two and do the math to estimate monthly spending. Do the same for car expenses, like fuel, maintenance, car washes, etc. Add these categories to your tracking system and subtract the amounts from your running total.

*Now you are done with the absolute necessities of what you have already committed to spend on a regular basis. Hopefully your calculator is not in the negatives! If it is, look closely at your grocery spending and your subscriptions.If this is the source of your trouble, consider making some changes here. If that is not a place you can tighten the purse strings, then seek real financial help. It is now on to what you care about and how you will prioritize them.

5.  Reflect on what you care about and what is most important. For us, the list goes something like this: savings, kids, paying off debt, travel, house maintenance, eating out, soda trips, and miscellaneous.

6. Create an “emergency” or “random expenses” category because there will always be some things that don’t fit.

7. Now split up the rest of the money. Decide, based on how much is left, how much of your remaining monthly income should be allocated to each of those categories. Subtract from the calculator total as you go. Do this realistically. Pretending that you can go the whole month without buying anything isn’t realistic. You will need to spend some money. This can be called Miscellaneous Spending, Mad Money or whatever silly name you like. An overestimate is always better than lying to yourself and putting yourself in a hole every month, but try to make it a number low enough that you will pause before purchases and be intentional about how you spend it.

8. Decide where any extra money is distributed. Consider splitting it among savings, paying off debt (like cars or student loans), and a travel fund.

What if there isn’t any money left over to split up?

• That’s okay. This is about the long game. You can, over time, reflect on how to decrease expenses in certain places if your spending doesn’t match your values. For instance, maybe moving or getting a cheaper car.
• Be patient. Hopefully raises will come or you will pay off a loan of some kind and more money becomes available. If that happens, don’t change your spending habits just because you have more money. This is probably the most impactful thing you can do. Instead, when the time comes, make any small tweaks that need to happen, then reflect on your priorities. Save towards those.

The budget is done. Now what?

• Start tracking your purchases. There are lots of ways to do this, but the more involved you are in the process of tracking, the more aware you are of what you are spending. The more often you do the tracking, the easier it is to know exactly what you spent it on.
• If you are using credit cards to gain reward points, pay off what you spend as soon as you track it.
• Transfer savings and travel savings to a different bank account. Wait until the month has finished to do this, as it will prevent overdrafting accounts when paying off credit cards. I suggest having a different savings account for your regular savings, your travel, and any other savings goal you have. It is extra motivation when you can see the numbers clearly adding up.
• Try to set all your recurring expenses to be taken in the beginning of the month, so that you don’t accidentally think you still have that money to use later in the month. But as long as you are keeping up with your tracking, that doesn’t usually happen.

So what if you go over in the budget in a category?

• Don’t feel bad. This will happen. If the money is being honestly allotted with your real habits in mind, this won’t be the case too often and rarely in multiple categories in the same month. Tracking and discussing how much you are spending weekly or bi-weekly should prevent you from getting out of hand. You are in control of what you spend, and knowing what is left allows you to make intentional choices.
• First, find a category that was light that month and take from there (for example, the gas bill is usually lower in the summer, and the electric in the winter).
• If that’s not possible, take it from the travel savings. This is one way to motivate you to spend responsibly, because having to dip into that category hurts extra.
• If you have to use all the travel savings to cover your overspends, then take it from that month’s savings. Note: I never go into our savings that is already transferred to pay for overspending. That money is locked away mentally for us.
• If you still haven’t taken care of the overspends, then track it and put it in the next month. It sucks to already use up that money before you even start, but there aren’t many other options. If you are using your credit card, you can’t actually pay it off until your first paycheck of that month comes along because the budget accounts for literally all of your money.

We don’t claim to be the experts here, but our own budget spreadsheet and tracking system has helped us consistently save money for travel over the past four years. Perhaps even more importantly, it gives us peace of mind to know what we can and can’t afford. We hope these tips are helpful, and we’d love to hear from anyone who is trying to be more intentional about spending and saving!