Have you ever tried to budget for a month, then forgot again. You tried again but got frustrated. The truth is that budgeting is a very “boring” step in the journey of personal financial management, but it is as important as learning a, b, c before learning to write a full sentence?
Budgeting – this very activity is not difficult in terms of calculations and math. It is difficult in terms of psychology. The biggest obstacles are ourselves. We tend to be “lazy” and “procrastinate” and use the same old excuse “I don’t know where to start”. In this blog post, I would like to share my budgeting experience with 7 simple steps. You will find out it is really that simple.
First you want to open a Google Sheet, or Excel, and open your credit card and bank account statements for the past 3 months (or 6 months is even better) in front of you. Having this information in front of you will help you gather it faster and more efficiently. You can also write in the sketchbook if you want.
You can take a look at my own budgeting dashboard (which also include Wealth Dashboard) here: MY WEALTH DASHBOARD
Table of Contents
Step 1: Set specific goals
Each of us will have 2-3 big financial goals at a time. Write it down, with a projected number for each goal.
For example:
-Buy a house (or have enough down payment)
-Early retirement
-Save for kids’ college expense
You can also add in smaller goals, like buying a car, fixing a kitchen, fixing a house, traveling to Europe. Write down your estimates for each of these goals
Then you think about of your desired income and savings in the next 3-5 years. Write that number down.
Step 2: Calculate your total income
If you are an employee and have a fixed salary every month without any additional income, then it is easy. However, if you have additional outside incomes from part-time jobs, child benefits, rental income, investments, tax refunds, cashback, side hustles, you should write down large income items. to form a subcategory in the Income header.
With irregular and miscellaneous incomes, they can be grouped into Other income
Step 3: Calculate and normalise your expense
-Review bank accounts, credit cards, outstanding invoices if any.
-Make a list of fixed expenses such as rent, bank loan payments, average monthly market price, electricity and water bills, Netflix subscription, etc.
-Make a list of variable expenses each month such as meals, cosmetics, entertainment, clothes, diapers, education expenses
You also don’t want to forget about expenses that are usually calculated on a quarterly/annual basis such as health insurance, life insurance, taxes, etc.
If possible, in the list above, you create 2 more columns: NEED and WANT to identify expenses that “cannot be avoided” (NEED) and expenses that can be cut (WANT)
After reviewing your spending for the last 3 months and eliminating adhoc expenses (remember to be honest when recording), you should have a fairly accurate estimate of how much you or your entire family will spend.
Tip: The simple way is to use existing spreadsheets or applications to help you track your spending.
Step 4: Create your Budget (aka spending plan)
You can think of a “budget” as a kind of spending plan, which means how you want to spend it. With that much income, how much money will be spent, and how much money will be spent on savings and investments. Set a goal for each of your dollar.
The Budget will need to meet the “necessary” expenses first, then the “want” ones.
When doing budgeting, don’t forget to save for your big and small goals.
With big goals: break down how much you need to save each year (X)
With smaller goals: break down how much you need to save each month (Y)
The Sum of X and Y would be the target number that you need to have after each year, either via saving or via investment or other income stream.
The most important RULE: DO NOT SPEND MORE THAN YOU CAN MAKE
(There may be months when your spending exceeds income due to the nature or seasonality of the expenses – for example paying for your child’s first school year.
Tips: always budget by year, or at least 6 months, then expenses and income will be “normalized” (normalize))
If your income is less than your expenses, there are two ways: one is to increase your income, the other is to reduce your spending and adjust your budget. With the second method, you need to review your variable expenses to reduce these expenses.
Step 5: Pay yourself first
As soon as you receive a salary or have income, you should cut a fixed amount and transfer it to your investment account to make it grow, or pay back your debt. This is how you let the money you earned work for you.
Try to increase your savings rate as high as possible (but not to the extreme of not spending at all because sooner or later you will feel discontent and give up budgeting).
Every small savings plus the value of compound interest and time will multiply, and work magically!
Step 6: Set up your Emergency Fund
If you don’t have an emergency fund yet, I strongly recommend you do it now. The average reserve fund should stay at 6-7 months of spending, or better yet, 12 months. You can save this money so that the value of money does not decrease with inflation but can still be withdrawn when needed. It is not recommended to invest in risky investments because the possibility of the value of the investment is lost when you need it the most is high
For example, in this spreadsheet, I create one category called Emergency fund and the amount I may want to save each month for this Fund (illustrative only)
Step 7: Review regularly
Finally, you should periodically review your budget on average once a month or two to make sure you stay on top of your finances and change your goals or spending patterns as needed.
In my experience, you should take the time to check in every month, or at the least, once a quarter to see where your income spending needs adjustment. Have I increased my income and saving yet? Are my investments profitable or making some loss ? Do I need to change your investment strategy? In the expenses, are there any unexpected items that need attention? etc
Final words
The above steps for the “newbie” can be a bit confusing, but as long as you understand the principles of money in and out and have a good tool (eg Excel, Google Spreadsheet), you can absolutely do it very quickly. After I completed my budget and understood my money in and out, I felt a lot more comfortable and confident about how I spent my money. Each coin will have a purpose and meaning on my journey.
You can also refer to my budget/wealth dashboard to get ideas and make your own templates (VIEW HERE).
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