You don’t need a budget to start saving, but you need one to know when you can quit!
A critical step to gaining financial freedom is establishing a budget. Notice I didn’t say “first” step here, and that is intentional. There are two other steps that you can do today, without having a budget, that will build a valuable foundation for savings.
Those are to contribute to your employer’s 401(k) (or equivalent plan), specifically maxing out any employer matching funds as soon as possible. If there is no employer matching, at least put something into your retirement account, even if it is only $10 / month to start.
I go into much more detail in this article about step 1:
The next step is to open an after-tax investment account and set up automatic withdrawals into the account. Again, just a few dollars a month if that is what you think you can afford (and you can guestimate that without a budget). Here is an article to support that idea as well. Trust me, you will thank yourself later:
Okay. Good! Now that you have gotten the super-simple, cannot lose strategies of investing in place (hint: start right away and keep on doing it – that is the secret), it is time to get a little more analytical about your financial picture.
The starting block for personal financial analysis is your monthly budget. If you don’t have one now that is okay. You are going to start one after reading this article, and it is super simple to do.
There are two components to a monthly budget that are both equally important. The first is writing down your monthly expenses and income. The second is tracking your spending.
Writing Down your Monthly Expenses and Income
This seems incredibly simple until you sit down to do it and realize that you haven’t been tracking your spending, so you don’t have a good idea of what you spend each month.
Don’t Panic!
That is the whole point of establishing a budget. Don’t get sidetracked because you don’t have complete and accurate information at your fingertips – yet. You would be surprised by how many people fall prey to this failure loop. They don’t have a budget because they don’t have a good idea of what their budget is.
Can you see the logic loop that can trip people up? I just coached a good friend through this exact exercise. He is a smart, educated professional adult and he was intimidated and initially stymied by the idea of setting up a budget; so, he just kept procrastinating and never did it.
The important thing is to get started. Below is a screenshot of the basic budget template I gave him, and a link which (hopefully) will allow you to open it in Google Sheets and copy / save it for your own use.
You don’t need to use a spreadsheet. Any sheet of paper will do to start, but spreadsheets do the math for you, so that is handy.
Once you have a template in mind and a place to record it, just get started. If you don’t know something, then guess! Chances are that you are pretty close, and if not, a budget is a dynamic creature that you will be constantly updating to reflect life changes.
Once you get a few months down the road on tracking your spending, the numbers in your budget will get more accurately dialed in, plus you may have forgotten a few things.
Relatedly, you may have annual or quarterly expenses that don’t show up every month and are easy to forget about. It is up to you how to handle those items, however dividing the less frequent expenses into their representative monthly amount can be a good way of keeping track.
One other thing you will notice is that I did not include “Savings” in the budget. That is something you can add in if you choose. However, I leave that out for two reasons: The first is that I endorse a “set it and forget it” strategy of saving that involves payroll deduction and auto withdrawals to after-tax accounts. I like the concept of saving to be something that is automatic, and not a discretionary choice each month.
The second reason is that the concept of savings is inherent in a budget. Any income that is over the amount of monthly spending is savings. Allocate it however you will, and with whatever tax strategy etc., but you can only save money that you don’t spend.
You can see from the screenshot that the model in my budget spreadsheet spends more than they earn. In that case it wouldn’t matter how much they “budgeted” to save; it wouldn’t happen anyway.
Tracking your Spending
Once you have a budget recorded somewhere, it is time to accurately track your spending. In the “good ol’ days” that would have meant hours spend with receipts and an adding machine. Well, thanks to technology, that is no longer the case!
There is a chance that your bank does a version of this in your checking account and / or with any credit cards you carry with that bank. That might be an option, particularly if you only spend out of checking, or with a credit card with the same bank.
The issues I have with that is that there is a good chance that you have credit cards or some other fashion of spending that falls outside the (electronic) walls of that particular banking institution. And, I have noticed that my bank, for instance, doesn’t do that great of a job of categorizing my expenses. The AI just isn’t super up to speed.
There are better products out there, but in the interest of time I am not going to list pros and cons of each. The three that I am personally familiar with, in ascending order, are Truebill, Mint and Personal Capital.
Truebill primarily looks for ways to reduce your monthly expenses for you by finding overpayments for subscriptions and negotiating with providers (for a tidy fee). As a by-product they track your spending for you. I tried it for a bit, but by that time I was already vested with Personal Capital and I found the spending tracking of Truebill to be less robust.
Prior to Personal Capital I worked with Mint. Mint is directly affiliated with Intuit, the folks that bring you TurboTax. There are some inherent plusses to this association, but for a variety of reasons I migrated to Personal Capital.
As you can infer at this point, my personal preference is Personal Capital (not an affiliate). I like the interface and the fact that they track your investment account totals as well as monthly spending.
Any of these services will work, the main point is to track your expenses in one easy-to-access place. Each of them will have AI that attempts to categorize your transactions. Typically, if you make manual changes the AI will learn and adapt over time to categorize things the way that works best for you. That said, some monthly cleanup will be necessary, especially if you spend with new and different vendors.
Putting it All Together
Now that you have a budget template, and an accurate accounting of your expenses, budgeting will be a snap. It is up to you if you want to track expenses monthly in your spreadsheet to get a visual idea of spending, or you can do what I do and just periodically update your basic budget to accurately reflect an average picture of your monthly spending.
You can get as elaborate and creative as you want or keep it as simple as possible. It is up to you. You will find that just getting started is the highest barrier to budgeting and the thing that keeps most people budget less.
Going forward you can use your budget as a tool to predict future scenarios and explore all manner of what-ifs. (Like what if we quit our jobs and travel full time?) The only way to accurately answer that question is rooted in your monthly budget and spending habits.
You can’t answer that question without a budget, and you won’t have a budget unless you start one today. So, get to budgeting!
Timothy Key spent over 26 years in the fire service as a firefighter/paramedic and various fire chief management roles. He firmly believes that bad managers destroy more than companies, and good managers create a passion that is contagious. Compassion, grace and gratitude drive the world; or at least they should. Follow me on Instagram, Facebook, and Twitter, and join the mail list.