I feel like the word "budget" can be so emotionally charged for some folks. Some people find it so limiting and restricting, and may avoid the process entirely. But in my experience, I find that creating (and following) a good spending plan can not only support one's path towards financial independence, it can offer so many great benefits:
Less financial stress and anxiety, especially knowing that you have a plan in place for your money.
More confidence in knowing that each dollar has a purpose.
Help in challenging the stigma of talking about money, especially if couples/families struggle with openly communicating about finances.
More control over your money, which can help prevent things like overspending, getting too far into debt, etc.
Below I've listed out seven steps for creating a budget, making adjustments as necessary, and tips to improve mindful spending.
(1) Decided on where your budget will be recorded.
Please choose a method that you know you will stick to and regularly reference. I love a good spreadsheet because I'm terrible at math and get lazy with calculations. There are also plenty of free tracking dashboards, like the one offered by Personal Capital. (I'm not sponsored by them, but their dashboard helped me at the beginning of my financial journey.)
If taking pen to paper helps you to be more mindful with your money, have a designated notebook or binder for your budget.
(2) Calculate your income after taxes.
Consider the obvious ones such as your salary or any steady payments that you can anticipate. I encourage you to note the number after taxes as this will give you a better idea of what funds you have available to you.
Take note of any other income, such as that from irregular self-employment, contract work, tips, or even dividends from savings accounts. While this income can be a little trickier to anticipate, it's still important to track (especially when tax season arrives).
Finally, take note of anything that might be unplanned. These can include gifts, cash back or rewards from credit cards, etc.
(3) Track spending for at least one month (or three if you can).
When I first started working with my financial coach, this was a critical step in building awareness and insight into my current needs and spending habits. It may sound odd to track first before developing a plan. Take some time to print out your bank statements from last month and/or start writing down every single time you spend money. Categorize and highlight expenses.
This may be an uncomfortable step (at first). If you're already dealing with issues such as financial anxiety, impulsive spending, or not saving any money at all, tracking will force you to confront these issues. Please note that as you continue to track your spending, these issues should decrease over time.
If you need some help in categorizing your expenses, I've compiled a list below.
List of Budget Categories
Housing
Utilities
Transportation
Food
Insurance
Healthcare
Personal Care
Business Expenses
Work Expenses
Debt Payments
Savings
Investments
Gifts
Entertainment
Children
Pets
Professional Services
Miscellaneous
(4) Take some time to write out your goals.
In my opinion, the fun part about budgeting! Consider what you would like to achieve in the short-term and long-term. This can include common goals like establishing an emergency fund or paying off all of your debt. You can also establish loftier goals like quitting your job to travel around the world for a year, or throwing your dream wedding.
I encourage you to lean into this process to really think about your FIRE goals and how you'll get there. If this starts to feel daunting, give yourself a chance to dream a little. Think more about the what of your goals. Then you can start to plan the how of getting there.
(5) Create a spending plan.
NOW you should write out your budget. Make it feasible and realistic based on the data you gathered while tracking your spending. One piece of advice that my own financial coach encourages me to remember is to underestimate your income and to overestimate your expenses. It may be tempting to tell yourself that you will not overspend in one area that you're trying to cut back on. (For example, my partner and I love cooking and dining out. We anticipate that our grocery and restaurant bills are on the higher-then-normal side each month as this is an area that brings us a lot of joy, especially when traveling.)
Create a spending plan, make sure that your expenses are within your means, and adjust accordingly until you have a solid, realistic plan in place. If your first draft shows that your expenses are more than your income, tweak your budget until your income is more than your expenses.
(6) Stick to your budget by practicing mindful and intentional spending.
When I was first working with my financial coach, I reviewed my spending and budget nearly daily. This was both exciting and uncomfortable because I was working towards big goals (including saving up to buy a home) while becoming painfully aware of habits that could sabotage my progress (namely expensive and unplanned purchases).
Take steps towards managing expenses for long-term gain. Examples of things to try out include:
Negotiate lower interest rates on your debt if you can.
Shop around for lower insurance rates (if it makes sense to your situation).
Use coupons, shop seasonally, and/or cook food at home.
Shop secondhand or go/do without.
Consider moving to a place with a lower cost of living.
Take other steps to boost income, such as:
Negotiate higher pay and/or search for a higher paying position.
Take on a side gig.
Sell items that you no longer use.
Rent out your car or a room in your home.
If you have a habit of overspending or making impulse buys, try to practice a stop-and-think approach. Before purchasing literally anything, consult your budget. Is the potential expense part of your spending plan? If not, is it an emergency or urgent expense? If the answer is "no" to both of these questions, explore what's coming up for you. If you notice things like FOMO, the urge for instant gratification, or anxiety, try to sit with the discomfort. I encourage you to wait anywhere from 24 hours to 1 week to see if the feelings go away.
I these feelings persist, they might be telling you that the purchase is a very important part of your spending plan, and your budget may need to be adjusted accordingly. If the feelings go away, then the purchase was not that important to begin with.
(7) Mindfully examine your budget and adjust accordingly.
Currently, I don't examine my spending and my budget everyday like I used to. Now, I check maybe a few times a week. I mindfully check my spending and budget each Sunday (I've literally set this up as an appointment in my calendar), as well as when I meet with my financial coach about once a month.
I've heard recommendations on adjusting one's budget each time there is a major life change, such as a move, job change or loss, inheritance, getting married, etc. Try to stick to your goals and not allow things like lifestyle creep derail your progress. Ultimately, a budget should allow you to feel freer and more confident that your money is going towards things that support your life.