Question

• At the end of each month, you would enter your actual spending in each category to identify budget variances. What is your experience with creating and using a personal budget?
• Have you tracked expenses to identify variances? If so, what method did you use?
• What new strategies are there? How can your tax withholding affect your budget or financial goals?

Answer 1

Creating your first budget can be extremely overwhelming. So overwhelming, in fact, that only 40% of American families have a working monthly budget. But it’s worth the effort. Developing a budget that you can maintain over the long term has been definitively linked to building wealth, while simultaneously helping you get out of debt and cut expenses.

When I built my first budget several years ago, I knew approximately how much money I was making annually, but I had never broken down my expenses by category to figure out what I could afford on a recurring basis, or how much money I could regularly invest.

In short, I was spending money on the things I needed and wanted without determining first whether I could truly afford them. After overdrawing my checking account once or twice, and having to pay several bills with credit cards because of my lack of a working budget, I decided to get real and begin a budget.

1. Decide to Start a Budget
I made the decision to begin a working budget. Congratulations! For many people, myself included, this is the hardest part.

2. Know How Much You Have
If you have savings, checking accounts, investment accounts, or any other financial instruments, you will want to know how much money is in each account as well as the interest rates and expenses of each one. Make note of this information as it will become important in determining your net worth and the best use of your capital in the future. If you use Personal Capital, they will automatically pull in this data when creating your budget.

3. Know How Much You Make
For some people, this is easier than others. Those on a salaried pay scale can easily find their monthly income. For hourly employees or those who work in a business where income may rise and fall unpredictably, this can be much more difficult. The most important consideration, regardless of how you earn your monthly income, is to determine the average monthly amount of income that you receive. A good way to do this, if you receive irregular income, is to average out the last 6 to 12 months of recurring income and use that figure. If you want to be extra conservative, you can choose the lowest monthly amount you have earned in the last year, which will hopefully provide you with a worst case scenario.

4. Know What You Owe
Determining your monthly recurring debt payments should be your next step. This should be fairly simple to do, as long as you have stopped incurring additional debt in the short term. If you haven’t been able to break your dependence on credit cards, that’s okay, as building a budget will act as a first step for your next financial priority which should be getting out of high interest consumer debt.

To find out what your monthly recurring debt payments are, calculate the total amount owed on each debt account as well as the minimum monthly payment. This includes car loans, mortgages, credit card debt, student loans, and all other debt that your family pays on a monthly basis.

This will provide you with the first few line items in your budget, and will allow you to determine your net worth.

Pro Tip: Are you currently paying off student loans? If so, you might be able to reduce your interest rate by refinancing with

5. Determine Your Net Worth
Once you know how much money you have and how much you owe, you can easily determine your net worth. Just subtract what you owe from what you have, and you will derive a number. This number will tell you the value of your financial resources. For me, this number was an eye opener. When I built my first budget, I had a negative net worth. I assume this is fairly common in America, especially for young people just starting out.

Pro tip: When you sign up for Personal Capital you can connect all your financial account and they will automatically calculate your net worth.

6. Determine Your Average Recurring Monthly Expenses
This can be the hard part for many people. The best way to determine your monthly expenses is to make a stack of household expenses for a month. Keep your receipts, your utility bills, and any other expense that arises during a one month period, and divide these bills into categories. The categories can be as general or as specific as you want them to be. I keep my categories extremely general (automotive/household), whereas you may prefer specific itemized categories such as (car wash/electric bill). Either way works well, as long as you determine an average amount of expenses for each category.

7. Enter this Information into a Database
It used to be, if you had a budget, you had an old school paper ledger. Things have changed for the better for all of us new budgeters. Software programs like Microsoft Excel and online budgeting tools like Personal Capital, Mint, You Need a Budget, and Mvelopes have made it much easier to take the results of your first few steps, and develop a highly adjustable and sustainable long term budget. I use Microsoft Excel for my own personal budget, because it allows a greater deal of flexibility than sites like Mint. However, many people swear by online budgeting sites, and whichever path you choose will ultimately help you build greater wealth and greatly help keep you out of financial trouble.

Pro tip: If you want the convenience of an online budgeting tool but like the simplicity of an Excel document, you might want to try Tiller. Tiller will automatically update a Google Sheet or Excel with your daily transactions.

8. Look at the Bottom Line
After entering all of the above information, you will discover the most important number in your budgeting process – the bottom line. This number will tell you whether you are overspending or underspending. Ideally, during this step you will find that you are living within your means, and maybe will even have a little left over on a monthly basis. On the flip side, you may determine you must make adjustments to your monthly expenses in order to live within your means.

9. Make Adjustments Accordingly
If the bottom line of your budget proved that you are overspending your monthly income, you will come to the most difficult step – making cuts to your monthly expenses. There are tons of resources here on Money Crashers that will teach you to be smarter with the income you have, help you cut your recurring monthly expenses, and establish your financial boundaries for personal budget planning.

10. Adjust Categories Based on Reality
Life is full of surprises. Food gets more expensive, gas prices rise, and rent can get hiked when you least expect it. Each time you notice inflation creeping up on your expense categories, get a raise at work and begin to earn more money, or worse, suffer a financial setback like a pay cut or job loss, you must adjust your categorical expenses based on the realities of the world around you.

11. Pay Yourself First
Depending where you are in your budget, based on your bottom line, you may want to add a few extra line items to your monthly expenses. These may be monthly dispersals to a savings account like UFB Direct, Capital One 360 or Ally Bank, Roth IRA, 529 college savings plan, or other savings vehicle. Moving money into savings and treating it like a recurring expense will allow you to slowly build up your savings without feeling like you must make these deposits from what is left at the end of the month.

Pro tip: Another savings option is through a Chime bank account. Chime will give you the chance to pay yourself first by automatically moving 10% of every paycheck into your savings account.

12. Track, Monitor, and Be Disciplined
Keeping track of your budget takes an hour or so a week. But this will save you a lot of time in the long run. Once you have an established budget, you will want to keep it in check. The discipline and associated knowledge that you are making good long term and short term financial choices will provide you with a great deal of comfort, and will take you from living paycheck to paycheck to being able to see the long term results of your disciplined savings and financial planning.

Everyone knows that a personal budget is key to financial success, but getting started can feel overwhelming. If you’re tired of getting to the end of your budget before you get to the end of the month.

Money management is tricky but with discipline and determination. There are several steps to take to create a successful personal budget. Creating a successful and manageable budget will keep you in the green and help you better understand where all your money goes. A personal budget will also help you when you ask for a raise or looking to make more money in your career. You will want to look at two to three months of your spending habits to get an idea of your current spending habits versus your income. This will make it easier to understand how savings will factor into your future. Whether I want to save money for a big trip or retirement, you’ll be able to calculate what you need to save and how long it will take. There are several tools you can use or you can go old school with spreadsheets and a traditional bank account.

1. Track how much money you have coming in

Take the time to understand all the money you have coming in, and that it all matches what you should be getting. In addition to your day job, do you have any other income on a monthly basis? Do you freelance or contract work with clients? Do you have a side business that brings in money? Consider these income avenues if they bring in steady cash flows.

2. Know your recurring monthly bills and expenses

List out all your monthly recurring bills, even the ones that are bi-annual or quarterly. This could include your monthly rent or mortgage, utility bills, cell phone bill, internet bill and any known medical bills. This will help you manage and you’ll be able to see where you need to re-allocate your money.

3. Live within your means

Review your expenses and make sure they’re in line with you make. If you’re spending more than you make, it’s time to reassess what you are spending. Spending less than what you make is the definition of “living within your means.” Use an app like Ask Trim to scan your bank accounts and credit cards. The app will analyze your recurring expenditures and subscriptions to determine where you can save more money or eliminate expenses.

4. Write down your personal finance goals

Create a simple spreadsheet with your expenses and income. Statistics show that people who write down their goals have an 80 percent chance of achieving them. So, why not type or write down your personal finance goals, too. Take a hard look, then ask yourself, do you have any savings or any leftover money? If the answer is no, go back and trim your expenses until you can save some money each week or month. Write down what you would like to save each month, whether it’s 10% of your paycheck or 30%.

5. Get an app to help you with your budget

You want to stay on track and on budget. Try Mint. It allows you to add budgets in different buckets such as food expenses, rent or mortgage and medical expenses. The app also warns you when you exceed them. You also have the option to automatically import your bank and credit card transactions, making it much simpler to stay on track.

6. Be realistic! Set yourself up for success

Don’t expect to be saving large amounts of money right away. Start small, and build up to more.

7. Set 1–3 “SMART” financial goals

Use the SMART method of goal setting. Your financial goals should be Specific, Measurable, Achievable, Realistic and Time Bound. Your financial goal could be saving for a trip or even paying off debt such as student loans. Achieving a small goal will give you confidence to set bigger goals.

8. Carry — and use — cash

Not using your debit or credit cards will help you stick to your budget. You’ll be more intentional about what you purchase and how much you want it or not. Using cash for your weekly errands and expenses will make you consider if you really need that latte or if you would rather add it to your savings account.

9. Crush your goals, take them to the next level

Once you’ve achieved something small, dream bigger! Goals can be as basic as adding to a savings account each month or as complicated as different amounts going into different accounts for vacations, savings, retirement, emergency funds or experimenting with alternative investments such as Veteran Business Bonds.

With Veteran Business Bonds, you can earn 5% interest and know that your money is going toward helping main street and veteran small businesses. Click here to learn more >>

Remember there will be some hiccups and you may have to make some adjustments along the way. It will take time to adjust and be more aware of your spending. Don’t be afraid to add new goals or adjust your goals. It can be as simple as making your own coffee instead of buying it or as complex as planning for retirement. To keep up, download this spreadsheet or sync your financial accounts with an app to get it all marked down.

Then, the real challenge will be following it. Develop your budget, understand what you have, how you are spending it and how to get more of what you really want, and become less of an impulse buyer. It’s your money. Put it to work for yourself!

Boost Your Savings and Get Started with a Monthly Budget Spreadsheet

As mentioned above, one tangible way to track your budget and create financial goals is through writing it down. Download this spreadsheet to do just that. Get started or revisit your personal budget with this Microsoft Excel spreadsheet. Set your monthly fixed and variable expenses and track your spending.

When it comes to household budgeting, it should be about more than just scraping by. With the 50/30/20 budget, you are determining how much you should be spending and what you should be spending it on. With this budgeting method, you are dividing up your income into 3 different categories. This budget comes down to determining needs, wants and savings.

• 50% of your income is for essentials. – This means that if you make $3000 a month, no more than $1500 should go to the necessities in your life. This means half of your income goes to the things you absolutely have to pay including: housing, food, utilities, and transportation cost.
• 30% of your income is for personal expenses. – This means that if you make $3000 a month, no more than $900 should be used for personal expenses. This includes: dining out, gym memberships, vacations, and other things that are not a necessity to life.
• 20% goes to savings. – Because you never know what curve balls life will throw at you. So it’s always important to have some savings. You should make a conscious decision to put 20% of your income into a savings account. This means that if you make $3000 a month, $600 per month should go into a savings account.

Using this method helps you allocate where your money should go. It also helps you figure out if you are spending 30% on living expenses and 60% on personal. It’s a great way to figure out what you are spending and where. If you want to read a more in depth explanation of this budgeting method.

Zero-Sum Budgeting Method

If you are like most people, you find it hard to make budgets last and work. You think… I can splurge here and make up next month. Although you really intend to make up for it, the truth is, you probably won’t. With a zero-sum budget, you are forcing yourself to spend EVERY SINGLE DOLLAR you make. However, you just won’t be spending it the way you think…Because by spend, I really mean you will allocate every dollar!

With the zero-sum budget, you tell every dollar where to go. Because if you have money that has nowhere to go, it will get spent! Right? How many times have you looked in your checking account and thought “oh I have xx dollars left so I can spend it on xx”! That won’t happen with this way to budget.

Therefore, your total amount of income and the total amount spent will equal zero at the end of the month. If you pay all your bills and still have $500 left over, you need to spend that money by paying down debts, putting it in savings, adding it to your sinking funds, giving to charity or investing it if your savings are fully funded. Whatever works for you. For most people it will be paying down debt and increasing their savings. You can use the snowball system to help you pay down your debt. Of course if you find that you’re spending more than you make each month then you have to start finding ways to cut back. I’ve written about lots of ways you can save money. Here’s one to get you started – Money Saving Tips You Can Use Each Month .

This way of budgeting does require discipline since you don’t really have a ton of flexibility. So be sure to realize that it will probably take a couple of months of budgeting to get it working just right (actually that’s pretty much true for any budgeting method).

3. Envelope Budgeting Method

If you tend to swipe your card and end up in a pickle when bills are due, the envelope system may be the budgeting method for you. The envelope budgeting method has you use cash instead of a card (or virtual cash if you use a budgeting app like GoodBudget or Mvelopes). This method works great because you physically see how much money you have. When the money is gone, you stop spending. Here’s a summary of how it works. I wrote a much more in depth post here – The Beginners Guide To The Cash Envelope System and also have free printable envelopes for you to use.

• Calculate your bills. – First step is to calculate how much of your total income you need for bills each month. Subtract your bills from your total income to determine how much you have left over. Bills include: utility bills, mortgage/rent, and living expenses.
• Make a budget. – Once you have a good idea how much you have left over, determine your categories. Then decided how much you want allocated to each category. Many people use the following categories: groceries, household items, gas, entertainment, gifts, savings, and fun money.
• Make your envelopes. – For each category you choose, write that on a different envelope. Only put the budgeted amount into each envelope on payday.
• Only use cash. – When you use the envelope method, it is important to only use the cash you put in the envelope. When the cash is gone, you have nothing left to spend on that category for the month.
• Adjust as necessary. – If you feel a certain budget is not working, or you are running out of money too quickly, adjust your budget to meet your family’s needs.

Proper planning will help you keep more of your paycheck and pay less to the Internal Revenue Service (IRS) each year.

You control how much is withheld from your paycheck. When you started your job, you completed a W-4 form, which tells your employer how much to withhold for the IRS on your behalf. To ensure you withhold just the right amount, use the IRS’ Withholding Calculator. Also, take a look at the size of your tax refund each spring.

Too much: If you get a refund, you had too much withheld from your paycheck. It would be better to have a little extra in your paycheck throughout the year, because otherwise, it’s like you’re giving the government an interest-free loan.

Too little: If you pay too little throughout the year, you’ll be hit with a big bill when you file your taxes, and you could face penalties and interest charges. Use this calculator to see if you’re withholding enough. (You'll need your pay stub, current number of withholding allowances, retirement plan savings percentage, any other payroll deductions, and your state tax rate ready.)

How to Adjust Your Withholding

To make changes to your W-4, see your benefits department or download a W-4 from the IRS. Taxpayers generally take one withholding allowance for themselves and each dependent. If you itemize deductions, you also can allot for deductions you take every year—such as for mortgage interest, property taxes, and charitable giving—if you itemize. Increasing allowances will leave more in your paycheck, while lowering allowances will withhold more.

When to Adjust Your Withholding

There is no limit on how often you can adjust your withholding, so complete a new W-4 form every time your life changes in a way that affects income taxes, such as:

• Starting a new job
• Changing benefits
• Having a baby
• Getting married or divorced
• Buying a home

Lower Your Tax Bill

Saving and investing plans can help lower your tax bill as well.

Individual Retirement Account (IRA): Those who meet IRS income requirements and other rules can deduct traditional IRA contributions.

Employer retirement plans: Contributing to a tax-deferred 401(k), 403(b), or 457 retirement plan will lower your tax bill. (SEP-IRAs, Keoghs and Solo 401(k) plans will do the same for the self-employed.)

Medical expenses. Contributing to an flexible spending account (FSA) or health savings account (HSA) also can lower your over overall tax bill. Run the numbers.