To many people, the term “budget” is an overused word that offers little help. If you’ve tried and failed to manage your money successfully in the past, this feeling is understandable. Yet the truth is that a simple budget — one that you actually stick to — could be the answer to a stress-free financial life you’ve been pursuing.
Teachers of this simple budget, Bethany and Scott Palmer are known as “The Money Couple.” Together, they have a combined four decades worth of experience as financial advisors.
If you want to learn how a simple budget can improve your finances and your day-to-day life, the Palmer’s Smart Budgeting: How to Create a Cashflow-Positive Budget And Stick to It course explains how to create a money plan that’s tailored just for you.
If you’ve tried various budgets before in the past and failed, don’t give up. Keep reading to learn how the Palmer’s approach to budgeting is different (hint: it’s designed with your “money personality” in mind) and how it can help your financial needs immediately.
The steps to create a simple budget are simple. In this article, here is the process we will explore:
- Viewing Your Budget Differently
- Clarify Your “Why”
- Discover Your Monthly Expenses
- Determine What You Can Spend
- Tackle Credit Card Debt
- Seven Ways To Make Your Budget Stick
- 5 Money Personalities
Ready to create a budget that will help you achieve your financial goals? Let’s get started.
How To Create a Simple Budget
Viewing Your Budget Differently
Do you think of a budget as a friend or an enemy? Is it a tool to give you what you want or a buzzkill that will suck all the fun out of your life?
Your answer to these questions depends on your past experiences with money.
For some, the word “budget” stirs up feelings of inadequacy or failure. Others, however, feel freedom when they imagine how a simple budget can help bring sanity into a chaotic financial situation.
Regardless of how you feel initially, it’s important to see your budget as a friend or something else that is positive. This first step of the simple budget is a mind shift for many people.
Don’t dread the prospect of a budget. Instead, welcome it. Why? Budgeting doesn’t restrict you from owning good things. On the contrary, it helps you afford what you want most.
How many times have you been unable to afford something you wanted or needed because, earlier in the month, you spent money on things you could have skipped? With a simple budget, you can choose to purchase the things that matter to you.
Clarify Your “Why”
You can’t plan a successful budget without first understanding why it matters to you. How you view the purpose of your budget is pivotal to its ultimate success or failure.
The next step of creating a simple budget is asking yourself what you are budgeting to save for. To begin, try to identify your big dreams.
- Do you love to travel?
- Would you like to save a down payment for a new home?
- Is your goal to give more money to your church or charity?
You must know your priorities — your why — before you can make a simple budget that works for you.
Discover Your Monthly Expenses
Once you define your “why,” there are still a few more steps you need to take before you can outline your monthly spending plan. You can’t decide where you want to spend your money without an honest look at where it’s been going.
You need to discover your monthly expenses. If you want to reach your destination (your financial goal), you need to know where you’re starting the journey.
When it comes to money, your best intentions are often sabotaged by hidden spending habits. For example, you might be surprised to learn that your morning latte and muffin cost you $80 unbudgeted dollars per month.
You’ll never have a good grasp on your finances as long as sneaky, hidden expenditures continue to ambush your budget. You have to catch and cut these hidden expenses.
Below are four steps to help you discover your monthly expenses.
#1: Create A List
The first step is to keep a list of every dollar you spend for one month. Once the hidden expenses are known, you can contain them by giving them a legitimate place in your budget.
#2: Add in Miscellaneous Expenses
Next, add in expenses that don’t come up every month like car registration, birthday gifts, medical checkups, vacations, etc. Consider dividing these expenses into 12 monthly portions and save for them a little at a time.
#3: Separate Your Expenses
After that, separate your spending into different categories, such as:
#4: Add Up All Expenses
Finally, add up what you spend each month in each general category.
You can use the “Get Real Month” worksheet in your “Smart Budgeting” course resources list to help.
Determine What You Can Spend
Now that you know why you want to spend your money differently, and you understand where your money has been going, it’s time to cover how to create a simple budget that works for you.
#1: Calculate Spendable Income
Your net spendable income is the amount you’ll work with each month when you build your spending plan.
The formula you need to calculate your net spendable income is as follows.
#2: Determine How You Want To Spend Your Money
Next, figure out how you want to spend your money. Below are some suggestions to help you start brainstorming. (Note: amounts, especially for housing, can vary from one part of the country to the next.)
- Housing – 33%
- Food – 12%
- Auto – 12%
- Insurance – 5%
- Debts – 5%
- Entertainment & Recreation – 5%
- Clothing – 5%
- Savings – 5%
- Medical – 4%
- Retirement – 8%
- Miscellaneous – 5%
#3: Include a Dream Account
Include a “Dream Account” in your budget. This is the fun category. Whether you want to save money for a special purchase or give it away, make space in your budget (maybe around 3% of your net spendable income) for your dream.
#4: Determine If You Are Sum Positive Or Negative
Once you enter your expenses into your “My Budget Worksheet,” you’ll have an overview of your spending. Is the sum positive? If so, you make more money than you spend.
If, however, your budget worksheet shows a negative sum, you’re spending more than you earn.
#5: Address The Results
Address the surplus or shortage. With a zero-sum budget, every dollar you earn has a job. If your worksheet shows a positive amount, you have extra money to put to work. Consider applying those funds to debt or savings goals.
When your expenses exceed your income, however, you need to solve the shortage.
You have two choices — earn more or spend less. Alternatively, you can try a little of both.
Want to earn more income? One of the following approaches might help.
- Ask for a raise
- Change jobs
- Work a part-time job or side gig
- Find ways to earn extra money
Tackle Credit Card Debt
Next, tackle any credit card debt you have. It’s hard to be profitable if you have mountains of debt, especially expensive credit card debt. One of the many strategies to pay down credit card debt is to try the avalanche method. Here’s how it works:
- Make a list of each creditor, account balance, interest rate, and minimum monthly payment you owe.
- Pay off the debt with the highest interest first while making the minimum payment on everything else.
- Find ways to free up more cash to pay down your highest-interest debt.
- When you pay off the first creditor on your list, move down to the next one and repeat the process.
Seven Ways To Make Your Budget Stick
Sticking with your new spending plan can be tough, especially at first.
You’re used to spending money one way. But now, you’re making major changes to the way you live your life.
These financial changes are worth it in the end, but breaking bad habits isn’t always fun.
Once you create a simple budget that makes sense on paper, the next step is using it. These seven tips may help.
#1: Keep Your “Why” At The Forefront Of Your Mind
Write down your why and read it aloud every month.
#2: Make A Date With Your Budget
Like any good relationship, your budget requires regular attention. Schedule a budget review at least once a month or more often.
#3: Keep It Real
If overspending consistently happens in a budgeting category, like eating out, consider a compromise. It’s fine to cut back but also budget a little more for this expense if you can.
The closer your plan is to reality, the more likely it is to work.
#4: Don’t Spend Designated Funds On Other Expenses
Some people use the cash envelope method to help with this.
For example, if you set aside $500 per month for groceries, put $500 in an envelope for that spending category.
Once the cash is gone, you can’t spend more on groceries until the next month.
Whatever your strategy is, avoid using funds for one category to pay for another category.
#5: Meal Plan
Food expenses are a common area of overspending. Meal planning stops you from busting your budget on dining out or grabbing whatever looks good on the grocery store shelf.
Packing a lunch every day can actually save you $1,222 per year.
#6: Look At Your Social Calendar
Do you have birthday parties, graduations, or holidays coming up for the month?
If so, plan these expenses into your budget.
#7: Curb Extra Spending
Before you buy, make a habit of asking yourself questions:
Do you have extra space in your home to store the item you’re purchasing? Will this item end up in a Goodwill donation box in a year? You can also try to give yourself a 24-hour cooling-off period, especially for larger purchases.
5 Money Personalities
As long-time financial advisors, the Palmers have learned that people have different personalities when it comes to money.
Learning your money personality (or rather your top two) can help you customize a simple budget that works best for you.
Below is a cheat sheet of the five different money personalities. It’s critical to incorporate the needs of your personality types (and your partner’s money personalities) into your budget.
Even if you’re trying to get out of debt, it’s crucial to set aside money to satisfy the money personality needs of you and your partner. If you don’t make room for those personalities, your budget won’t work in the long run.
Take the “Money Personality Assessment” in the course resources section. This will help you find your top two money personalities.
A Simple Budget Can Change Your Life
In truth, budgeting may not come naturally to you. In fact, it may be a pain point stemming from past failure. But challenge yourself to create a simple budget and stick to it. Eventually, budgeting will become a habit and can make you feel more in control of the finances of your life.
Michelle Black is a credit expert with over 16 years of experience in the industry and a freelance writer.