When my husband and I got married at the ripe age of 20 years old, we made plenty of mistakes. Ironically, one of them was not not having a budget - I religiously updated our (now somewhat-more-perfected) monthly budget almost daily as I tracked ingoing and outgoing expenses. To my intense frustration, my husband was just… not… getting it.
To (hopefully) save you some pains that my poor husband experienced, here are the basics of what exactly a budget is, why you care, and how to decide on a budgeting system. Feel like you have a handle on that? Check out my First Budgeting Session post to help you organize your budget (either with yourself or a partner).
What it is
Put simply, a budget is a document, usually in spreadsheet form. It has two main categories - incoming money (your paycheck, investment earnings, inheritance, spousal/child support, or similar) and outgoing money (savings, your rent, bills, living expenses, entertainment, home purchases, etc). We will dive more into both of these categories shortly, but spoiler alert - a balanced (functional) budget has equal amounts of incoming and outgoing money. For our math people out there:
Incoming money - Outgoing money = 0
Remember this. This is an essential concept.
Why you care
Because a budget is balanced, meaning that incoming money is the same dollar amount as outgoing money, a budget is a way for you to cast a vote on the kind of life you want to live. Which do I value more, living close to where I work, or having a vast garden where I can decompress? Do I care more about the types of clothing that I wear or the types of foods that I eat? Would I prefer to go on one extra special vacation a year (or less often), or take regular weekend trips to more local destinations? The answer to these questions and many, many others can be found in your budget.
Now, you might rightly be wondering where these answers are hidden in rows of and columns of numbers, and guess what? They aren’t there… at least, not all of them. Most of these answers are found to the (usually left-hand) side of a table, with the innocuous names of “Savings” and “Expenses”.
Your Expenses subcategory is often broken down into sections before being broken into partitions to help organize the types of transactions taking place. My sections include Charitable Contributions, Utilities, Home, Daily Living, and Transportation. Each of these sections contains partitions like my Savings category does. As some examples, Cell Phone, Internet, and Water/Sewer/Garbage are all partitions in my Utilities section. Your sections and partitions will look different than mine, although there will probably be significant overlap. The types of partitions you make are highly representative of your goals - if it is important enough, it will find its way on your budget. If not, then it probably wasn’t that important (at least, not in this season of life).
Your Budgeting System
Each individual and couple has different spending habits. There is no one perfect solution to figuring out your money. However, as a budget tracks two things, incoming money and outgoing money, it is imperative that your Budgeting System tracks those as well.
Most of us have a pretty good idea of how much incoming money we have (who hasn’t checked their bank account to see if your paycheck has come through?). If you are not sure how much incoming money you have, look at your 3 most recent paystubs (or click here if your paycheck varies significantly according to season). We are going to look at your net income (the amount that gets deposited into your bank account) first. This is the base of your Incoming Money category.
Don’t dismiss other forms of income, though. Cash gifts (including inheritance or winning the lottery) and child/spousal support payments are also income (assuming that your ex pays on time and routinely - if he/she does not, I would not recommend planning on those funds on a monthly basis). Social security or other retirement benefits should also be considered incoming money.
Add your paycheck and other income(s) together for your net income (what comes into your account every month). Write/type that number down for reference.
Outgoing money is somewhat more complicated, enough so that it is almost the sole focus of the First Budgeting Session. For right now, simply list all of the sections under Expenses and all the partitions (including those under Savings) you can think of. With this brainstorming and information in hand, you are ready for your First Budgeting Session!
I spend most of my spare time playing with spreadsheets, my violin, or planting vegetables in my garden in hopes of bringing new insights into frugal living. Please enjoy, and don't forget to sign up for our monthly newsletter here.
Disclaimer - Mrs. FB is not a financial advisor. Nothing in these articles should be construed as investment or other professional advice, but rather personal opinion. Some links in these posts may be to affiliate sites - no products are advertised through this site that have not been personally used by the FB family unless expressly labeled.