Now that you’ve got all your expenses averaged and categorized, we’re going to do a little of that adding and subtracting I told you about last time.
First, add up your income.
(We do one weird thing with our income: I never include the healthcare and 401k contributions Mr. Millenial Money’s work takes out automatically. We are so unbelievably fortunate to have these options available to us, so I hope it doesn’t sound rude when I say that I pretend they don’t exist. But it’s just easier for me, when budgeting, to not even consider that money coming in at all since I consider it non-variable non-discretionary spending. Some finance gurus would wholeheartedly disagree with this approach. If you do as well, use your full income here and add healthcare/401k/etc. as line items on the budget in whatever category makes sense for you.)
Now, subtract your expenses. Start with the non-variable non-discretionary. Ours is just our mortgage, but maybe you have other expenses you consider non-variable, like a cell phone bill you need for work and have already negotiated to rock bottom.
Next, move on to variable non-discretionary expenses, and then discretionary.
Now that we’ve subtracted all your expenses from your income, we have a skeleton of your budget. This essentially shows how you’ve been spending your money already, since it’s based on the averages from months past you calculated in my last post.
But the point of a budget isn’t to do things how you’ve been doing them. It’s to improve your financial health. So I hope you wrote in pencil (or for you weird techies, have a backspace button), because we’re going to look at this skeleton and tweak it a bit.
Are there any expenses that surprise you? Maybe you have more discretionary spending than you think. Can you cut back? When you subtracted your expenses from your income, was there a good amount of money leftover? Maybe budget more to go into your savings or on your debt. If, in practice, you don’t actually feel like you have a lot leftover every month, go back through your expenses to see if you left any out. On the other end of the spectrum, are you in the negative? Then you need to go back through and see what you can cut, working from discretionary to variable non-discretionary.
You also want to take a second to think of your goals. Do you have a large student loan you’d like to pay off? What about credit card debt? Those should take priority over everything else, so you will want to cut discretionary spending and lower variable non-discretionary spending to accommodate more money going to debt payoff. Is there something big you’re saving towards? For us, we know we want to take four big trips before we start trying for kids in a few years. To make that goal happen, we made huge cutbacks so we can put a larger amount in our travel savings fund every month.
Add these changes in and make a new budget. This is the real thing this time, and it’s the one you need to stick to!
Do check-ins every month or so to see how your actual numbers are matching up with your budgeted numbers. For discretionary spending like coffees out or video games, you can keep a tally in your wallet or phone so you know how much of the budget you’ve used up for the month. If you find you’re having trouble sticking to a budget, consider using Dave Ramsey’s “Envelope System,” which many people love but proved to be a little too old school even for my extreme tech-averse personality.
And that’s it! You’re now an adult with a budget. Congratulations! If you’re looking for ideas on where to cut, check in for next week’s post.