At its core, balancing a budget is telling your money what to do. The ideal time to create your monthly budget is before the start of the month. For example, I created my budget for January 2019 in December. This month, i’ll be managing an income of $16,636.53 to be distributed across 6 categories as outlined below. Note how every penny of income is allocated to a budget category, there is no ‘buffer’. This month i’ll be living off of 52.01% of my post tax income. What’s amazing to think about is that once my student loans are paid off, and once i’m married, i’d be living off of just 39.98% of my post-tax income. Wow!
I have a ‘budget template’ that serves as my starting point, but always end up customizing it for the one-off bills that are due in each particular month. For example, this January I have a one-off medical bill of $159.10 as well as eye contacts to purchase for $150, so I’ve added it to my ‘Insurance’ category which already has 2 recurring expenses (Progressive car insurance, and Lemonade renters insurance):
My budget template also underscores 2 very real problems we all have: debt and life events. In addition to paying off $170,000 by the end of 2019 i’m also cash flowing an $80,000 wedding with no help from any outside sources. With a wedding date of April 2019, I need to save at least $7,000 in January to hit my $80,000 target. So both the student loan and wedding budget need to be accounted for in my January budget:
Creating your personal budget is personal and underscores your values, beliefs, hopes and dreams. Despite the uniqueness of our lives, there are 4 core rules that all personal budgets need to follow. There is no exception: follow these rules and own your money.
Rule 1: Know every expense
It does not matter if you make $1,000 or $100,000, you need to know all of your expenses, yes even the $0.99 Apple iTunes recurring expense. For example, I have $9.93 of itunes storage expense every month. This represents 0.0005969% of this month’s income, but I include it anyway. If you’re a little loose with cashflow like I was, this exercise will serve as a good analysis to review all of your digital < $20 subscriptions, which this month add up to $54.90. When I first implemented a detail personal budget, I realized that I was spending well over $200 a month in digital subscriptions, and was paying for HBO-go twice. Take the time to review all of your recurring expenses, even the < $20.
Rule 2: Know the due date of each expense
When I was younger and first started making more than $100k a year, I used alot of ‘mental math’ to manage my money. Not really knowing the exact due dates of individual bills (e.g. utilities, cable) but jusitfying it by knowing that regardless if the bill was due on the 3rd or the 20th, I was reasonably confident that I’d have enough cash in the back to cover it. Although this works for many people, it creates a scenario in which it’s too easy to lose track of expenses while simultaneously encouraging potentially wreckless spending. To avoid this, put each expenses’ due date in the expense line item. This will also ensure you know if it’s a bill you’re paying on with paycheck 1, or paycheck 3. Know the exact date each expense is due.
Rule 3: Every dollar has a budget
Some people call this ‘zero based budgeting’, which is a fancy way of taking every dollar of income and mapping to a expense. If you earn $11,324.56 in one month, then you would have $11,324.56 of expenses, not $10,500 or $11,300. This month, I have $16,636.53 of income, so i’ll have $16,636.53 of expenses. An easy way to manage excess income is to allocate additional earnings to a single discretionary category, in my example, the wedding. Your remaining balance (income – expense) should always equal 0.
Rule 4: Pay your bills with your debit card
Alot of my friends and peers pay their utilities, groceries, and other living expenses with their credit card and in turn pay off the credit card at the end of the month. This is primarily done in the pursuit of cash back or reward points. Guys this mental math and additional burden is not worth it. 1% cash would yield just $1,000 if you spend $100,000. Countless studies have shown that you spend more when you pay with credit card vs cash. You are not winning. Furthermore it’s another transaction which needs to be reconciled and zeroed out in your excel/personal finance app of choice. You’re also supporting an industry which makes money off the backs of the poor and middle class. No thanks. Pay with your debit card and avoid the headache.
January 2019 budget
Now that we’re aligned on the 4 rules of creating a personal budget, let’s dive into the details. Here is my January 2019 budget. It should read like a profit & loss or income statement. You are the CFO of You, Inc and you’ve been hired to manage your income. Remember, i’ve made this budget in December and i’m allocating each dollar I earn to a category before the month begins.
The frequency in which you’re paid will ultimately determine the # of columns you’ll have in your personal budget template. If, for example, I was paid every week, it may be easier for me to have 4 columns and in turn allocate individual expenses to one of the 4 columns. Right now, my income is distributed twice, on the 1st and again on the 16th, so
My expenses will all be allocated into one of the two columns:
Column 1 - expenses paid between the 1st and the 15th Column 2 - expenses paid between the 16th and 31st
I make, at a minimum, a $2002/monthly payment towards my student loan. This is a recurring bill that is in my budget template which for the month of January, represents 12.09% of my post-tax income. This is part of a larger plan to pay off $170,000 of student loan debt by 2020. For January 2019, my payment is the floor of my monthly payment calendar since i’m also cash flowing a wedding. But post wedding, monthly payments will be as high as $17,000. Note how i’m paying my student loan on the 10th this month, which means that this expense goes in “column 1 – expenses paid between the 1st and the 15th”. Column 2, is ‘N/A’ representing a $0 payment.
I categorize housing expenses as anything related to my physical dwelling which includes: utilities, cell phone (I get it, this is negotiable), storage, rent and internet. All of these expenses are recurring, and therefore included in my budget template. Housing represents only 14.10% of my total income, of which rent represents just 12.02%. The rent in SF is out of control, but I’ve took on roommates to reduce expenses and accelerate my student loan debt repayment schedule. Note how expenses are categorized into column 1 or column 2 depending on the due date. This helps manage cashflow and ensure I never reach a negative balance in my checking account.
The insurance category includes all insurance types with the exception of health insurance. My rationale for excluding health insurance is that although it is paid for with post-tax dollars, it is deducted from my paycheck before deposited into my account. It is possible to make a case to include it in your personal budget, but at the very minimum you should know how much your health insurance costs you on a monthly or annualized basis. If i were to include personal health insurance, it would be an additional $105 per month or $52.50 per pay period. Progressive & Lemonade insurance are recurring bills which are part of my budget template, but this month I also have to pay a medical bill of $159.10 and order more contact lenses, so i’ve added both as one-time expenses to my insurance category, along with anticipated due dates. This category represents only 2.67% of January’s income.
I have two amazing dogs which bring joy and happiness to my life, and there is no dollar value which I trade for their happiness. The good news is that on a monthly basis, the pets represent just $405.40 of my total expenses, but this month it’s a little different. In the month of December I had to take one of my frenchies to the ER which produced a post-insurance out of pocket of $924. In the month of January we have a follow up visit with both a neurologist and a dermatologist which will cost an estimate $800, so i’ve been sure to allocate these visits in my January 2019 budget. In aggregate, pet expenses represent about 7.25% of January’s income.
Subscriptions represent all of the digital subscriptions (apps, news) which I pay for a monthly basis. This includes : itunes storage, Wallstreet Journal, Spotify, myfitnesspal, and a gym app. In aggregate this is $54.90 or 0.33% of my January budget. Although this category is small, it was by far the most difficult for me to quantify when i first started. I actually had no clue how many digital subscriptions I had 1 year ago today. Think about your digital platforms: amazon, facebook, apple, google, hulu, netflix, and so on. Can you quantify the number of digital subscriptions you have right now , the corresponding due dates, and bill amount? If not, take time track down this information. For me, this category was originally > $200 a month 1 year ago today!
Think of life as my day-to-day expenses which keep me moving. Gas, groceries, restaurants, gym, and fun money. If you’re planning a budget for the first time, this will be the hardest category to quantify, and you will most likely under-estimate how much money you spend on groceries and restaurants. It took me almost 3 months to get an accurate measurement on how much money I really spent on food. Once you’re able to quantify life expenses, this is the area where you will tighten your belt. $300 a month eating out may sound like
In fact, relative to the % of total, life represents just 15.63% of my January income, and “fun money” represents only 6.37%. For those in debt, starting a budget for the first time, or not sure where to start. Focus on your ‘life’ category. It’s ok if the individual line items or budget amounts or % of totals dont match mine. What’s important is for you to be able to know with confidence how much you’re spending on life’s necessities. Note how i’ve included training and cycling as part of my ‘life budget’. I acknowledge this is complete discretionary spending, and will be the first on the chopping block if I need to cut spending.
Wedding is my discretionary category which I use to ‘zero-out’ my budget (income – expense = 0). Note how in previous expense categories, all expenses are ‘big round numbers’ like $225 or $530. Wedding is not because it calculate as income – sum(all expenses). This gap (which I hope is large for you), represents all of my money which has not been allocated to an expense category. For January 2019, this represents $7,983.73 or 47.99% of my income. It needs to be this high because I’m cashflowing an $80,000 wedding which needs to be paid in full by April 2019. Once the wedding is complete (yay!) this entire discretionary budget will be reallocated to student loans.
Do I use any budgeting software?
If you follow this plan, and use excel, there is no need to use software like (YNAB, mint.com, etc). Your money is planned before the month starts, and once you enter the month, you tell your money what to do, not some random app. If you were to use software, i’d recommend everydollar – it is a digital version of the excel sheet i’ve just reviewed. But to reiterate, most people do not need software to manage a personal budget. I actually withdraw cash twice a month (1st and 16th) to use as my fun money. The quantity of transactions which flow through my checking account are minimal. No software required. There aren’t any hacks to personal finance or managing a budget. There isn’t a single piece of software which is going to make you financially responsible!