In the previous post, we talked about the 8 reasons why having a budget really matters. Providing you with a WHY is important. In Simon Sinek’s book “Start with Why”, he said that people are driven and motivated to do something if they have a compelling WHY. Yours might be something else other than the list I provided so hang on to that. Keep those WHYs front and center in your mind. And know that you CAN do this.
My big WHY is that I grew up in a household where money was always an issue. We barely knew then where our next meal will come from.
I do not want to go back to that kind of life.
I do not want my kids to experience hunger pains because we only ate once or twice a day (if we’re lucky), and mostly just rice plus soy sauce or fish sauce or sugar water. That was all we can afford back then.
Amidst my mom’s superior financial IQ, there is only so far a PHP 500 or PHP 1000 (equivalent to $10 or $20) can go in a month. Nope, I’m not missing any zeroes there, just $10 to $20 a month, that was how much my mom was working with. So instead of a monthly budget, ours was adjusted every single day.
What amazes me though is that even when my mom had to work with that very small amount, she will hustle day and night on her side gig — sewing clothes, selling whatever she can sell just to add a little bit more money to our measly fortune. She AVOIDED debt. AT ALL COSTS. She would rather die hungry than get into debt.
My mom made so many sacrifices for us so we’ll have a much better future. She wanted to change the trajectory of our lives. She wanted to rewrite our family history.
AND SHE DID!
My other WHY is to continue my mom’s legacy of financial freedom for our family.
Now that you know my big WHY, ask yourself for your own compelling reason why you want to become financially independent. When you have your big WHY front and center, it becomes easier to make wise choices and temporary sacrifices if they will lead you to closer to your WHY. If you are married, make sure you ask your spouse as well. It is time to dream together so you’re both motivated to make this work.
Prior to setting up your monthly budget, make sure that you’re also putting in at least 15% in your retirement account with or without company matching. The power of compound interest will be your BFF at retirement so know that whatever money you put into retirement today will grow and enable you to retire comfortably in the future. This is your path to wealth. You can retire a millionaire if you do this one simple act of paying yourself first.
But first, to make budgeting easier, I recommend the EveryDollar app, which is available in both IOS and Android. This is the app we use to create our monthly budget and track our expenses. I love having this app on my phone so I can quickly add a purchase into a specific budget category immediately. It gives me an idea of how much money I have left on that category. There is a paid version of that app included in a Ramsey+ membership which links your bank account to the app. In our case, the free version of the app serves our needs well. To be honest, the idea of linking our bank accounts to an external app scares me so we just use the free version.
STEP 1 – Figure out your NET income
Take a look at your NET INCOME, which is essentially your take home pay. This is your how much you’re paid less all deductions (retirement, taxes, medical, dental, vision, etc.). To create a zero-based monthly budget, your net income will be the magic number that all your expenses should total to.
STEP 2 – Create the categories you’ll need to allot for
You have to think about the specific categories that you want in your budget. What categories you allot is really up to you. You have to think about the things you spend on each month. If you’re single and you tend to eat out more than you shop for groceries, then maybe having a category for Food where both Groceries and Restaurant budget will be lumped together. However, the more detailed your categories are, the more it will be easier to track where the FAT in your budget is, and where you can cut unnecessary spending. Nevertheless, do not make so many categories that you have a hard time keeping up with your budget. You have to strike a nice balance between detailed but not too much detail.
A word of caution though, if getting into detail is paralyzing you in finalizing your budget for the month, make it generic for now and add details as you go along. Do not overthink and over-analyze this to the point of not acting on it. The faster you can get this going, the faster you can take control of your finances.
Nothing is too petty in your budget. What’s important is that you’re honest with yourself and you’re not excluding a particular category.
For those categories that are only paid a few times a year, I suggest keeping them in your budget and making this a savings fund. Categories that would fall under this would include Auto and/or Home Insurance, HOA, etc. How much to allot for this will be discussed in the next step.
Here are some example of categories that would fall under the Savings Fund:
- Emergency Fund is for those instances when life happens. Your car broke down and you need to repair it ASAP or you wouldn’t be able to go to work. Your water heater broke down. Your air-conditioning stopped working in the middle of scorching summer in Texas. Your heater conked out in the midst of the grueling winter in the East Coast. You lost your job — bills still have to get paid, right? I could go on and on. Emergency fund is there when sh*t happens. It’s to defy Murphy’s Law because let me tell you, life will happen. You just have to be ready for it. The rule of thumb is to have at least 3-6 months of living expenses in your emergency fund. If you use up a portion of that to pay for true emergencies, make sure you replenish it and not let it dwindle down ok?
- Sinking Fund is for things that don’t come up very often. For example, car maintenance or repair is something that you should plan for, especially for an older car. You do not know when you’ll need it but it helps knowing that you have a fund set aside to cover that expense in the future. Another example is house repairs – air-conditioning, heater, or water heater repairs, etc. Once you have a fully funded 3-6 months of emergency fund in place, you can add this category in your savings fund so instead of taking out money from your emergency fund for house or car repairs, you can use your sinking fund for that purpose. Sinking funds can be detailed or it can be general — whatever floats your boat. It can be as detailed as Car Maintenance Fund or House Repair Fund, or just the generic Sinking Fund. This one is optional too. If you prefer to lump it all in your Emergency Fund, that’s ok too.
- Vacation Fund is for your getaway. The best way to go on a vacation is to go on a fully paid vacation. You can do this by dividing the amount you’re budgeting for your vacation into 12 and set aside that amount every month so that in 12 months, you’re ready to go on your fully funded vacation. You can take that much-needed vacation worry free. No more anxiety about payments when you get back from that awesome trip!
- Annual subscriptions or membership dues like Amazon Prime, Costco warehouse membership, etc. Since these dues are paid annually, you can split the payments into 12 and have a savings account on your budget to accumulate the payment so it doesn’t hurt your finances when these memberships are due.
- Car insurance payments can be split into 12 and accumulated every month.
- Property Taxes if you’re not putting it in escrow. You have to save for this every month or you’ll get sticker shock when taxes are due especially on states with high property tax rates or high home values that result in high property taxes.
- Home/Earthquake/Flood Insurance which are usually paid once a year and if not in escrow, you would need to save up for this every month as well.
- Christmas Gifts can also be added to your savings fund so you won’t have to fork out a lump sum by November or December. Or worse, charge everything on your credit card to pay later. Have a specific budget for Christmas gifts (or even gifts in general) and have that amount saved up every month so you won’t have to worry about it when it’s time to shop for gifts. Having this in place will ensure that you have the funds to cover the gift giving without going into debt. Giving gifts without debt will really make you happy and jolly instead of grumpy.
Don’t worry though. The categories in your budget isn’t set in stone. You can change, add, delete, or update each category as you go along. The primary goal is to have a starting point and then you can adjust as you go. The longer you keep this budget thing going, the more adept you will become at this.
STEP 3 – Allot a percentage or a set amount to each of the budget category
Once you’ve listed the categories you’ll need to allot for, you now need to think of how much you are going to allot for that specific category each month. This can be a percentage of your net income or a set amount, depending on which way you want to go. It can also be a mix of both. For example, for your Groceries category, if you want to allot 20% of your net income to it, then do so. For your Transportation, if you only need to set aside a specific amount for gas each month, then feel free to allot that set amount.
Like the budget category, there is no right or wrong way in doing this. It is also not set in stone. You can make adjustments as you see fit. For instance, if you’ve allotted so much money on groceries and eating out but feel that you need more funds on transportation because gas prices are going up, then adjust your Food budget and move some of it to your Transportation budget.
STEP 4 – Ensure that when all the amounts in the budget categories are added together, the total would be your net income – nothing over or under
Now it’s time to add all those specific amounts for each category. Make sure that the total is your take home pay, up to the penny, and no more, no less.
If the total amount in your categories is over your take home pay, make adjustments until they total up to it. Likewise, if the total amount is way below your take home pay, make adjustments as necessary too. It might take you a little bit of time to do the pluses and minuses on each category, which is why an app is very convenient because it adds it up for you quickly.
Know this though – this is HOW you’ll control your money. This is how you’ll know HOW FAR your money can go without putting you in significant amount of debt. This is what you’re working with. Stick with it because this is HOW you’ll win with money.
STEP 5 – Have a budget meeting
If you’re married, this is a MUST do step. If you’re single, you can skip this step or find an accountability partner whom you trust to keep you accountable.
My husband’s a free spirit. He trusts me to do the budgeting every month. It doesn’t mean his opinions don’t matter though.
Marriage is becoming one. This includes your finances. There is no HIS or HER money in a marriage, only OURS, including a budget. A budget is a chance for the two of you to dream together, work on a goal together, and make sure that you are both marching to the same tune.
Is it easy? Never!
Will there be disagreements? You bet!
Marriage is the same thing though. It is never easy and there are disagreements. But you both work it out. Together.
Having an accountability partner like your spouse keeps you in check. He/she can remind you of WHY you’re both doing this in the first place.
You can adjust according to what you’ve agreed on by repeating Steps 2 to 4 until your expenses total to your net amount.
For spouses who are not truly on board, it might take some time for them to warm up to the idea but keep trying. You have to keep reminding each other WHY you’re doing this. Most of all, your money is yours and your spouse’s business. Take it seriously.
So there you have it, folks. My hope is that you have now created your monthly budget. You are now set to start tracking your spending and making adjustments as necessary.
To summarize, here are the steps to setting up a zero-based monthly budget:
- Step 1 – Figure out your net income
- Step 2 – Create the categories you need
- Step 3 – Allot a percentage or a specific amount to each of the categories
- Step 4 – When you add all the amounts in your categories, the total should be your net income
- Step 5 – Have a budget meeting
I will not sugarcoat it. Budgeting can be hard, especially in the beginning, but it is so worth it! Picture yourself a few years from now with millions in net worth. It CAN happen but you have to be tenacious and consistent with your money habits. Start with budgeting.
In the comments below, tell me, which part of this exercise was the most challenging? If this is your first time in creating a monthly budget, how has your experience been like? If you already have a budget in place, are there any challenges you’re currently experiencing? I would love to know!
