Let’s dive into how to create a budget and my tips for beating common challenges.
Step 1: Create a budget
To effectively create a budget, you’ll need to know how much you usually spend in certain areas.
Gather your credit card or checking account statements for the last 3 to 6 months.
Read through the purchases and mark each purchase into different categories. It’s up to you how you categorize your purchases, but here are categories to consider:
- Cell phone bill
- Internet bill
- Utility bills
- Eating out
- Fun money
- Car payment
- Car insurance
- Household items
The list can go on from here, and it’s up to you about how detailed you want to be. You can have just a couple of broader categories or you can break everything down into very specific buckets (like I did above).
Now that you’ve looked through the list of your past expenses, you can average out how much you’ve spent in each area. Here, your goal is to estimate how much you spend in each category every month. These numbers will become your monthly budget.
Also, don’t forget to include bills that you pay infrequently. They may not have come up during the past couple of months. For example, perhaps you pay your car insurance bill every six months and that bill is usually around $600. You’ll want to budget $100 per month towards car insurance so when the bill is due, you are prepared.
Using all these numbers, you’ll want to create a budget.
You want to put your budget is a place that is accessible for you to view and easy for you to compare how you’re doing each day.
I love the app You Need A Budget (YNAB) for creating a budget. It’s where I create my budget and track my expenses. I’ve tried many different budgeting apps before, but none of them worked quite as well as YNAB.
In whichever app you chose (or excel spreadsheet), you can now input your monthly budget!
Step 2: Know where you stand
Now that you’ve created your budget, you’ll need to follow through to know where you stand.
After all, that work you just did to create a budget does no good if you don’t use it!
I recommend checking-in daily with your budget to know exactly where you stand. When you do this daily, it will become a habit. (Woohoo for making a great new habit!)
If you’re using YNAB or another app to track your finances, this will be easy. You can open the app and categorize purchases into different categories. You can then look to see how much money you have left in each category. (This will take no more than five minutes each day.)
If you’re tracking your budget with a spreadsheet, consider logging into your bank account/credit card accounts each morning and writing your purchases on your spreadsheet. It will only take five minutes each day and it will help to know where you stand!
Step 3: Evaluate
At the end of each month, take the time to evaluate how you are doing. If you aren’t happy with your spending for the month, treat yourself with grace.
Perhaps you missed a category altogether when you created your budget. Use this time as an opportunity to create that category.
If you’re blowing your budget in a certain area, ask yourself why? Is your budget not realistic? Or do you actually need to create new habits to replace a bad one?
For example, maybe you’re spending far more money eating out than you wish. Perhaps you need to build a new habit of bringing lunch to work instead of eating out. Building a new habit will be the best way to reduce spending. Habits become automatic so you don’t have to think about it all the time.
In the meantime, though, you will have to think about packing that lunch. Perhaps you can set a personal challenge to bring your lunch to work every day for an entire month. You could even do this challenge with a work colleague so you have someone to hold you accountable. After that, the action will likely become a habit you work into your daily routine.
Remember, treat yourself with grace when evaluating your budget!
Three reasons you might not stick to your budget…
There are many reasons why someone isn’t sticking to a budget, but let’s discuss three of the most common reasons.
Perhaps the thought of making a budget and tracking it every day is overwhelming. I totally hear you – this sounds like a lot to do, especially if you’re just starting to get your spending and budget under control.
But here’s the fun fact about overwhelm: It’s all in your head. You see a daunting list of things to do and your mind gets worked up about it. However, the good news about it being in your head is that you can overcome the overwhelm.
Create a to-do list of all the action items you need to do to create or stick to your budget. Now, break down each of those bullet points into smaller steps. (Smaller steps makes it easier to tackle each item.)
At the beginning that list will include action items such as download the latest credit card statements, read through each credit card statement and categorize purchases, total up purchases in each area, etc.
Set aside time on your calendar to accomplish certain items on that list. That list doesn’t need to get done in one day!
For your daily expenses tracking, create a calendar event or a reminder on your phone to nudge you every day to look at your spending. (This will help create a habit!)
Have grace with yourself. Beating yourself up for not sticking to your budget will only make you less like to stick to your budget in the future.
Perhaps you’ve developed poor habits over the years. I’ve been there too. I’ve fallen into the habit of buying multiple coffees out each day when I should be making them at home.
The first step to changing your spending is to recognize you have a poor habit and decide what you want to replace that habit with.
Now comes the hard work of rewiring your brain to make a new habit. If you’re trying to break a very ingrained habit, consider focusing an entire month on changing that habit (without working on other goals). This will allow your brain to really focus on changing this habit.
In order to develop a new habit, you need a trigger to remind you to do a certain habit. Then you need a reward after you did the habit.
Take my earlier example when I was spending so much money at coffee shops and I wanted to bring my own coffee to work. I started with the trigger: I placed my to-go coffee mug right next to my coffee maker. Each morning when I made my coffee, I saw the mug. Then I would automatically make a second cup (this is my afternoon coffee) and put it into the mug. When I got home each day, I would wash the mug and put it right next to my coffee maker again.
The “reward” part of this habit was the harder part to figure out. I realized that part of the reason I liked to get an afternoon coffee at a coffee shop was so that I could walk outside and leave the office for fifteen minutes. I found this time so refreshing.
So, now with my home-brewed coffee, I take the mug outside in the afternoon and go for a little walk. I’m still getting my reward (outside time) while saving money on all those coffees.
A scarcity mindset can manifest in two different ways: spending very little (and hoarding all your money) or spending a lot (because when else will you be able to buy XYZ thing?).
Let’s focus here on spending a lot. Perhaps in an earlier stage of your life, you wished you could have had certain “cool” toys or clothes, but you/your family wasn’t able to afford these things. And from that, you developed a scarcity mindset.
Now, as an adult, this scarcity mindset leads to overspending where you want to buy every cool toy/clothes to prove your status to those around you. You finally have those status symbols.
The first step in changing your mindset is realizing that you have a scarcity mindset. The second step is shifting your mindset from scarcity to an abundance mindset.
An abundance mindset is where you know and believe that there is always enough. Here are three steps you can take to shift your mindset:
- Write out a list of ten things that you want that you already have. Do this every day for a week with ten new things. This will help you realize all the great things you already have!
- Implement a daily gratitude practice.
- Share your wealth. Add a recurring “giving” line to your budget and chose one charity or organization to give to. Freely giving money (even just a bit) to a cause you believe in will help you feel in abundance with your money.
I hope these common budget-breakers were helpful for you to see why you aren’t sticking to your budget. And I hope you now have ideas of how to start overcoming these challenges!