How to Start a Simple Budget

The following is an excerpt from my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.

Most of us cringe at the thought of living off a budget. Some think that a budget is “money jail.” And as my mom would say, “It goes against my nature.” While it does require some time and effort, I’m here to tell you that it’s much easier than you might think to create and live off a simple budget. If you do, it will allow you to control your money and not the other way around.

PART 1: THE BASICS:

Knowing Where It’s Going

The first step in the process of taking control of your money is knowing where it’s going. Using the simple table below, write down every expense you’ve incurred over the past month. Use your bank’s and/or credit card’s online account system to pull the date from. Don’t forget to account for what you’re paying for in cash. Another option is to save all your receipts for a month, then tally them up at the end of the month—although this could be a tad tedious. Highlight all the standard monthly expenses—mortgage/rent, utilities, etc. Then start looking at other expenses like eating out and grocery shopping. You may want to go back 3 months to help develop a good base average.

I’d be willing to bet that once you see this data written down, you will say to yourself, “Wow, I didn’t realize I was spending so much on that!” Or, “I totally forgot about that expense.” You get the picture. Writing everything down will begin to help you take charge and manage your expenses—the first step in your transformation process.

Below is a visual to show you how simple it is and to give you an idea of standard expenses to track. If you’d like, you can use a Word or Excel document—or just write it out on paper.

Expenses

Write down all your expenses for the past month into a table similar to the one below:

EXPENSE	AMOUNT
Mortgage/Rent	$
HOA Dues (if applicable)	$
Groceries	$
Auto Fuel	$
Dining Out (restaurants/fast food)	$
Auto/Life/Home Insurance	$
Cable TV & Internet	$
Netflix/Hulu/Etc.	$
Cell Phone	$
Other Entertainment	$
Electricity	$
Gas	$
Water	$
Trash/Recycling	$
Medical/Prescriptions	$
Gym Membership	$
Tithe/Giving/Charity	$
Other Expense:	$
Other Expense:	$
Other Expense:	$
Other Expense:	$
Other Expense:	$
Other Expense:	$
TOTAL EXPENSES	$

Income

Now write down your earned income and subtract your expenses to determine your margin.

Salary	$
Commission/Bonus	$
Part-time job	$
Side gig/other income	$
TOTAL INCOME	$

Expecting the Unexpected

Determining your recurring expenses should be the easy part; it’s the unplanned ones that cause trouble. It’s impossible to predict your car is not going to start and need a new $200 battery. As a result, I have added an Other Expenses line. This is arguably the most important line item in your budget sheet, and without noting it you’ll end up paying for it. I suggest plugging in a number you can manage. After several months of tracking your spending, you can go back to calculate an average.

For your flexible expenses, I suggest adding an Actual Amount line on your budget sheet, as seen below. There will always be ebb and flow with these types of expenses and tracking the actual amounts will give you pertinent data to make informed decisions about what adjustments need to be made. As you can see from my sample, I was $175 over budget and thus needed to focus on cutting down my food bills.

EXPENSE	BUDGET	ACTUAL AMOUNT
Auto fuel	$150	$110
Dining Out	$150	$220
Groceries	$500	$620
Giving	$250	$200
Other Expenses	$100	$175
TOTALS	$1,150	$1,325

TIPS:

Another tip to create margin is to overbudget. For example, round up your expense numbers. Let’s say your rent is $775 a month. Round it up to $800. By rounding up your numbers each month, it will create some wiggle room and a huge margin for yourself in the long run!

The most important thing to remember about budgeting is that it must be reviewed often. You will be making constant modifications due to increased or decreased income and expenses, etc. Life is always changing, and you must adapt and adjust your budget accordingly. For example, if you just had a baby—time for a whole new kind of budget.

Budgeting Tools

Thankfully, we live in the Technology Age. There are dozens of outstanding software programs and apps available to help us successfully budget—so there should be no excuse! I’ve used Quicken and now use Mint because they sync to our online bank account and seamlessly transfer the data. I also love all the different types of reports Quicken and Mint provide. At the end of each year, I can generate a cash inflow and outflow report and compare it to reports of years past. I look for trends to determine what area may need adjusting. My wife is still old school and budgets using pen and paper, but she has also used a spending tracker app on her phone. There are many resources out there. Do your own research to determine what works best for you.

PART 2: THE MINDSET:

The Backward Budget

I want to challenge you to think differently about your finances. Start making financial goals every year by determining these 3 steps: 1) how much to give away; 2) how much to save; and 3) how to pay off and stay out of debt. There are essentially 6 things you can do with your money, and we generally do them in this order:

1. Spend
2. Pay Bills
3. Repay Debt
4. Pay Taxes
5. Save
6. Give

It’s time to systematically change the way you view money. When you begin to reorder and reprioritize your finances, you will have more money. This will require you to examine your heart and change your priorities. Although this shift may be difficult at first, by thinking more of others (giving), your future (saving), and less of immediate gratification you will start to realize how little money you actually need to live. Think about charities or causes you are passionate about. Do you have a church you love to attend? When you realize all the need around you it will change your mindset. When my wife and I got involved in charities that support childhood cancer research, it softened our hearts and we willingly volunteer our time and donate what money we can. Additionally, we tithe regularly to our church and try to save at least 20% of our income. When you focus on giving and saving first, you will start to see a change in any frivolous spending you might have previously participated in.

I challenge you to flip your list. Think of it as a backward budget. Give first, save second, and live off the rest. You probably won’t be able to live the same lifestyle you are currently living, but that might be a good thing.

What if you prioritized your budget like this:

1. Give
2. Save
3. Spend (live on the rest)

Living off Percentages

To maximize your margin, you must start living by percentages. We are all living off a percentage of our incomes, and most of us don’t know what it is. If you don’t choose what percentage of your income you live on, someone else will choose it for you. For example, many experts suggest that you should not pay more than 30% of your salary (before taxes) for housing.

For your overall budget, the most common dispersal is the 80-10-10—which is spend 80%, save 10%, and give 10%. Another option to consider is 60-20-20 or 70-15-15. I would highly recommend you make an effort to save at least 15% of your income. If you work for a company that offers a 401(k)-type retirement plan, take full advantage of it. Paying into a 401(k) could be included in the 15%, but you also want to have an emergency savings account that you can access without the penalties a long-term retirement plan would ding you with. After writing down your budget, you will have a clearer idea of what percentage plan works best for you.

TIP: If you really want to create margin, try living off 50% of what you earn.

Final Thoughts

If you think being smart enough to make money translates to being smart enough to manage money, nothing could be further from the truth. By not exercising self-control, you are giving up control to someone else. Because we have bought the lie that we deserve more—a certain lifestyle level—it leads to a lack of self-control. But when we are in debt, our finances are controlled by outside influences. And this situation is due to a lack of self-control. Why would you do that? Why would you give up your freedom?

Make the decision to change your mindset about money and your behavior regarding spending. It could be the most important decision of your life.