HOW TO START A BUDGET THAT ACTUALLY WORKS / EVERYDOLLAR
Updated: Oct 4, 2019
Budgeting has been honestly the number one thing that has made the biggest impact in my financial journey. Growing up my parents instilled the practice of saving instead of spending every dollar I made, however I never fully grasped the concept of budgeting until after I was married and my husband and I took Dave Ramsey's Financial Peace class. In this post I'm going to walk you through how you can start a budget when you don't know where to start and show you the tools that we use in order to stay on track with our spending and savings goals.
KNOW YOUR WHY:
The first thing that you need when you are setting up a budget is your "why". Why are you wanting to budget, what is your motivator? This is going to be so important in order to keep you motivated and sticking to your budget. When my hubby and I started really tracking our expenses and sticking to a budget our why was to get out of debt. Between the two of us we had over $100k in student loan debt!! I will share our full debt freedom story someday but knowing "why" we were setting up our budget was the driving force to keep us going. What is your why?
EVERYDOLLAR BUDGETING APP:
I want to walk you guys through how to set up your budget utilizing EveryDollar, it is a free budgeting website and app that has been the number one tool that has kept my husband and I on track with our budget this past year. There are a number of other websites/apps out there that we have tried but honestly this one checked all of the boxes we were looking for. So before we dive into this I want to start with saying that setting up a budget is so important but is hard work. It is not going to be easy but the payoff is going to be so worth it so stick with me!!!
A budget is where you get to tell your money what to do instead of your money telling you what it is going to do.
Ok so to start you need to know where you stand with your income. What I want you to do is to look at the last 6 months of your net income (after taxes/insurance). Total up the last 6 months then divide that by 6 to get your average monthly income. You are going to need to know this in order to know how much you have to spend/save when setting up your budget. You want to go off the average in order to get an accurate budget, if you go off your highest monthly income it is not going to be an accurate budget.
The next step is to sit down and track your last 3 months of expenses, this will include:
Literally write down all of your expenses broken down into categories from the last 3 months - yes every single transaction and then divide that out by 3 to get your average monthly expenses, this is going to help you when setting up your budget categories.
Once you have these numbers you can create your EveryDollar account, it will walk you through how to set it up when you sign up so I'm just going to skip straight to punching in the numbers!!
SETTING UP YOUR BUDGET:
1) ADD YOUR INCOME: Add in your income averages, if you get paid once a month add that, if you get paid bi-weekly make sure you enter it that way. For this example we are going to use a bi-weekly income of $2,000, so a monthly total income of $4,000.
2) ADD YOUR EXPENSES:
I would suggest that you start with adding your fixed expenses, so your bills and debt then after those we will talk about setting up your day to day expenses. As you are working through this I want you to make sure that you are including everything! The goal of EveryDollar is to assign every single dollar that is coming in a task, we want to make sure that we are telling our money what to do instead of the other way around.
Create a budget category called bills, within that you will breakdown what each bill is and the amounts. You will want to make sure you plug in the numbers for every single monthly bill that you pay. Below is an example of what you might have. Don't leave anything out!! Even if it is a $1 monthly expense make sure you include it!
Next add in all of your debts, I know it can be scary to see realistic numbers of what is owed but guys it is so important to know what you owe so you can get to work on paying it off!! Trust me when we were going through Dave's class and saw the total of how much we owed I about had a panic attack!! But I want to let you know that it is possible to reach freedom!! Setting up a budget is the first step so please take the time to write it all out.
Alright guys so this next step is to create categories for all of your daily expenses. Instead of grouping all of your daily expenses into a miscellaneous budget group I want to suggest a little different idea. I would suggest that you create one section called "Cash Envelopes", yes did you catch on I'm also suggesting you implement cash envelopes but we will go into that further in depth in another post. Within this section you will want to break down each of your daily spending transactions into grouped budget categories. Below you will see an idea of what I'm suggesting. As you are creating these budget groups start assigning a dollar amount for each section according to what you noticed when reviewing your past 3 months of expenses. This will help you start seeing what you are currently spending and then you can reevaluate if you need to make changes later, but it is important to know where you are starting from.
The reason why I'm suggesting that you break these down instead of just having a miscellaneous category that catches all of these expenses is due to my experience. When hubby and I were first budgeting we had a basic miscellaneous category which houses things like eating out, coffee runs, clothes etc but we kept getting ourselves in trouble because we would over spend on say coffee and then if one of us needed some new clothes we didn't have any money left for them because we spent it all on coffee!! After several months of this happening I decided to try something new and that is to break down the miscellaneous expenses into separate categories and actually assign a specific dollar amount to each one. This was honestly a game changer for us! Not only did is allow us to see that we were spending way too much money on coffee runs but it also allowed us to stay on budget.
3) HOW MUCH SHOULD YOU BE SPENDING?
Now that you have all of your budgets set up based off what your averages have been it is now time to look at and see if you need to make any adjustments. Dave Ramsey has come up with a really helpful percentage guideline that will show you how much you should be spending in each category (graphic from everydollar.com). If you notice that you are way off track in certain categories now is the time to start making some changes. Now keep in mind where it says miscellaneous and personal spending those are now going to be categorized under your cash envelopes categories.
This is something that I am going to go in depth in a future post but I want you to start thinking about your savings goals now and as you are working on your spending budgets make sure that you are allowing money leftover to start putting into savings.
Again I will go into this in another post in extreme depth but I want to suggest that you start with what Dave suggests as setting up an $1,000 emergency fund. This emergency fund would be used in an actual emergency like if you lost your job and you needed to be able to cover your necessary expenses not if you really need that new pair of designer shoes.
I know this is not going to be an easy task but stick with it, hold onto your WHY. I know you can do it if you just keep going and don't get discouraged if you go over budget or get knocked down, make adjustments when needed and just keep going!! It is a journey but the end result will be so rewarding!!!
Let me know what budgeting questions you have or what else you would like to see from me in the comments below!