How to Budget In The Real World

If you are struggling with money, the best place to start is with a budget. For many, the word “budget” sounds restrictive, but I’m here to tell you there is freedom in a budget!

When you know how much you can spend on food, entertainment, and personal items each month, you will have peace of mind and confidence when it comes to your money, and that’s not the only benefit. Budgeting is the first step to creating wealth.

Let’s get started!

If you have been confused by budgeting in the past, it’s probably because you were using a method that isn’t reflective of real life. In real life, you get paid on different days of the month, each month, or you may even get paid every other month or irregularly. Not to worry! I’m going to teach you a better way to budget that works with your life.

Quick note: This post contains affiliate links to products I use, know, and love! Affiliate links mean that if you sign up for something through my link I may receive a small commission. I only recommend products that I have tested, use for myself or for clients. Affiliate links do not increase pricing and in many cases give you access to additional bonuses, services, or freebies.

A Better Way to Budget

To create a budget that works for your life, you’ll need to know two things: what your expenses are and when you get paid.

Check your spending on your phone with Personal Capital.

What Are Your Expenses?

What do you pay for each month? Do you keep it all in your head? If so it’s time to free yourself of that burden and get it out of your head! Use a pen and paper or a spreadsheet and list everything you spend on each month, when it’s due, and how much it is.

Expenses can be broken down into bills and spending, and even further into nine categories: giving, housing, utilities, food, transportation, personal, health, entertainment, and saving. Here are recommended spending percentages of net income for each spending category.

List Your Bills First

First, identify your bills. These are items that you pay for each month on a regular basis. They include rent or mortgage, insurance, car payment, credit card minimum payments, student loan payment, utilities, and subscriptions. Pay your bills each month online from your checking account, and set them up on auto-pay if the amount is the same each month.

Identify Spending

Next, identify spending. These are things you pay for with cash, a credit or debit card, Venmo, or Paypal, for example. Spending fluctuates each month and is the reason most people struggle to budget, overspend, or throw in the towel when it comes to tracking expenses.

But don’t worry, I have a solution, and it doesn’t involve using only cash (who has time for that?) or the more familiar, old-school, envelope system. Who wants to carry around clunky envelopes? That’s for the birds.

The solution is to use ONE credit card for all spending. More on this below.

The challenge with spending is we often buy things we haven’t planned for. Even though they may not be in your monthly spending plan, they still need to be accounted for. These include:

  • Impulse purchases at retail stores
  • Entertainment. Think concert tickets, ski pass, events.
  • Repairs and maintenance for car and home
  • Pet expenses
  • Travel
  • Medical

Each time an expense like this comes up, add it to your budget. Then it’s there for the next time. Whatever you don’t spend on in a month should go into savings.

For those items that come up unexpectedly, use funds in your savings account. If you don’t have a savings account yet, go ahead and set one up where you bank and connect it to your personal checking account for overdraft protection. If you are looking for a high return, consider an online bank such as Ally or CNote. Note that Ally Bank is FDIC-insured and has a 2.1% rate and CNote is not FDIC-insured and has a 2.75% return.

This budgeting method will help you build up your cash reserves. Replenish your savings account each time you make a withdrawal to pay for unexpected expenses. For example, if this month you had to pay for your dentist visit, add that expense to your budget so it’s there for the next time it occurs.

When Do You Get Paid?

Do you get paid once per month, on the same day each month, or semi monthly? In real life, you can expect a paycheck on specific days of the month. Your budget should be based on your paydays. So, if you get paid on the 7th and 21st, , then your budget starts on the 7th and ends the day before the first pay period of the next month. If your next pay period is August 4, then your budget ends August 3.

Similarly, if you get paid September 15 and don’t get paid again until November 3, then your budget goes from September 15 through November 2. The key is to identify the days you will get a paycheck and pay all the bills due before your next paycheck on that date. Start the process over when you get your next paycheck.

When are your bills due?

Organize your bills by due date. If your bill’s due date falls between your first pay period of the month and your second pay period, then pay it when you get your first paycheck. If it is due after your second paycheck of the month, pay it the day you get your next paycheck. Once your bills have been paid you can easily see how much you have left over for spending, saving, and giving.

How to Organize Your Budget

Start by listing the amount of your first paycheck of the month or period in a column. Underneath it, enter the balance of your checking account. Then, list the bills you will pay from that paycheck. If you are using a spreadsheet, be sure to enter the bill amount as a negative number. Use a formula to determine the amount left over. Whatever is left will carry over to your next pay period.

Here’s an example.

Start a new column and enter the amount of your paycheck and the amount left over from the prior pay period. Then, enter the bills you will pay from this paycheck, along with periodic, irregular, or unexpected expenses. Whatever you don’t spend on these, transfer to savings at the end of the month. In this example, $25 was spent on repairs and therefore wasn’t transferred to savings.

Get my budgeting template delivered to your inbox.

Give Yourself an Allowance

Give yourself an “allowance” for spending. Determine in advance how much you can spend on your credit card on things such as groceries, gas, personal, and entertainment. How much is the right amount? Use the spending percentages above as a guide.

Wondering how to stay on track? Use a spend tracker to track where your money is going and to make sure you don’t overspend.

Here are the ones I recommend:

Personal Capital

WellWallet

ClarityMoney

Mint

Important: do not spend more than you budget for on your credit card! Check in with your spend tracker every day to make sure you are on track. If you have hit your predetermined limit in any category then do not spend any more until your next pay period hits and you can “give yourself an allowance” again.

Credit Card Spending

While cash is the easiest way to track your money and not overspend, in reality using cash can become a headache. I tried it for a month and got tired of making a special trip to the ATM every week and going inside to pay for gas. That’s why I recommend using ONE credit card and paying it in full each month.

Account for Credit Card Spending On Your Budget

Your credit card transactions are their own micro-budget, and they can easily be accounted for on your budget! Your allowance is your credit card spending, and you will enter it as one line-item in your budget, and break down those expenses in your budget below that to keep track of your spending.

For example, if your allowance for each pay period is $300 including $50 for gas, $100 for groceries, $100 for personal, and $50 for entertainment, use your credit card for that spending. The key here is to track your spending and not go over what you have allowed in your credit card micro-budget.

You can make one payment at the end of the month for all the spending that went on that credit card, or you can break it up into one payment for each pay period, whichever is easiest for you. In the example above, I have broken it down into two payments of $300 each. The most important thing to note here is that your credit card must be paid in full each month

How to Stay on Track

There are two things you can do each month to make your new budget work for you and stay on track.

First, make a money date with yourself each month. This is a time to review your budget, plan for upcoming expenses, and make sure you spent within your planned amounts. This is also the time when you will transfer any money that wasn’t spent on periodic, irregular, or unexpected expenses to your savings account.

Get my FREE monthly money checklist here.

Secondly, if you aren’t already using a spend tracker, I highly recommend you do! This is a simple way to monitor your expenses, especially those on a credit card, to make sure you are staying within you allowance for the month. I also love spend trackers because you can easily categorize your transactions so they match your budget to a T.

If you love spreadsheets and want your spending automatically updated and imported daily to your own Google Sheet or Excel, then check out Tiller.

Take it one step further with automatic bill reduction with Trim.

If you are ready for a budget makeover, and want to get on track to creating wealth, schedule a free enrollment conversation and see how an Impact Session or financial coaching can help!

Leave a Comment