Here are the main goals, in my opinion, of using a monthly financial budget:
- Spend less than what you make. I know this sounds obvious, but this is a basic principle that we violate too often. And we need to make a plan to ensure we live within our limits.
- Pay all bills and necessary expenses in full and on time.
- Be able to allot money for specific funds like:
- Things you want to purchase (paying cash for a a piece of furniture, a car, a trip, etc.)
- Irregular expenses (vehicle registration, gift giving, HOA fees)
- Unexpected expenses (home/car repairs, medical needs)
- Giving to causes you believe in (ministries, social justice organizations, or individuals in need)
1. Start with your monthly income. This is your first number from which all expenses will be deducted. If you get paid on a different interval (weekly or bi-weekly), figure out a monthly amount just to set up your budget. Later in the week, we will look at more details in setting up the timing of when different deductions should be taken out.
2. List your monthly bills and deduct from your income amount. These are just your regular, mostly set amount bills that you pay every month. Here are mine:
- church giving/tithe
- mortgage
- gas
- water
- electric
- cell phone
- internet
- school loans
- car insurance
- life insurance
- credit card (due to be completely paid off in April, the first time in our 8 years of marriage!!)
3. List your monthly necessary spending needs and deduct from your income amount. You need to determine an amount for each category. This can be challenging if you’ve never lived on a budget before. The best way to determine these amounts is 2-3 months of tracking every expense. You can always go back in your account online and designate your transactions into each category to get an idea of how much you have typically been spending. Here are mine:
- gas
- groceries
- eating out
- personal care
4. List your irregular bills/expenses, divide them into monthly amounts, and deduct from your income amount. We usually have bills and expenses that aren’t due every month or just pop up periodically. I would recommend dividing what’s needed to pay for these things into monthly amounts where you can put back a little each month. This really helps to not get caught off guard with a big bill due and no way to squeeze it in that month. Here are a few categories that I have had through the years:
- Gift giving, including Christmas
- Vehicle registration and taxes
- HOA dues
5. List the things you need to put back for/plan for and deduct from your income amount. These can be things that happen unexpectedly like car repairs or medical bills, but it can also be purchases you are planning for in order to not go into debt. You may be planning to buy a car or another big item or just something you want to buy that you don’t have the money for right now. You’ll need to designate a monthly amount for each of these items.
- Car maintenance
- Medical expenses
- Home maintenance
- Making a purchase you need to save up for (like furniture, appliances, moving expenses, a car)
Dave Ramsey has a helpful online tool that gives recommended percentages for each budget category here. You enter your budget amounts and it quickly gives an assessment if you are allocating too much for any category.
We use the software from YNAB (You Need A Budget) – it's wonderful! I've used different programs over the years (as well as just pen and paper) but this is my favorite by far. Easy to use and helps you plan ahead, set up to get you living on last month's income so you're never waiting for a paycheck to be able to pay bills and have a bit of a "safety net."
I have found some of Dave Ramsey's thoughts helpful but didn't care for his budgeting software, it wasn't very adjustable or intuitive to use. (Not the tool you linked, I did find that helpful when we were first setting up a budget, but his actual software I didn't care for.) I do like his "debt snowball" stuff – we will pay off my car this year (hopefully by mid-year, but we'll see!) and then our only outstanding debts will be Luke's truck (a business expense) and our house! I can't wait!
That sounds great, Erin. I love operating on last month's income. We have done that before too & it's so helpful!
We've been using a written budget at the beginning of the month for 3 years now. During that time, we have learned that writing down our budget with an old fashioned pen & paper works best for us. We can now do our budget in about 15 minutes, because we have our system down.
We learned about budgeting from Dave Ramsey and I think your post is similar to what he teaches. Congratulations on paying off your credit cards! What a lovely feeling.
Malisa, isn't it great when your system works for you? Our seems to be getting easier too. I enjoy that part of it! and yes, a lot is from Dave Ramsey! Good stuff!