How to Make a Realistic Budget That Actually Works

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Kumiko Ehrmantraut

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Kumiko Ehrmantraut

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• Instant Gratification Wish List: Becoming a Patient Spender - July 17, 2019

Budgeting can be a frustrating process. This week, I had the opportunity to talk about it live on the Gold Newsletter Podcast. During our half-hour conversation, I was able to bring up some simple, yet effective ways, you can win with budgeting.

The truth is, the more a plan works and shows real progress, the more we’re likely to stick with it. The same goes for budgeting.

I know budgeting works! My goal here on TBM is to help you find ways to make budgeting successful in your own life. That means seeing real progress and developing practical solutions to your money problems.

There is no doubt that your budget is personal. In fact, it’s one of the most honest and personal things you can create. Sometimes, it’s so real that it can be scary at times. It’s completely dependent on YOUR financial circumstances, expenses, and personal goals.

Over the last seven years, I have come up with some ways that can make budgeting easier and more effective. I realized that once I started implementing these things in my budgeting process, the more successful my budget became.

The numbers started to make sense, sticking to my budget became like second nature, and I finally felt like I had a plan for my money.

• Read: How to Budget Your Income and Expenses

Here are some things you can do to make sure your budget is realistic and successful.

KNOW THE NUMBERS

Nothing is more important than making your budget realistic. What does that actually mean?

It’s easy to write down some numbers on a piece of paper. The hard part about budgeting is making those numbers resemble your actual life. The more realistic you are about each of these numbers, the more likely you’ll be able to stick to your budget.

If you aren’t willing to put in some investigative work, budgeting won’t work. It’s that simple. You have to be aware of how much money is coming in and how much money is going out. You also need to know where your money is going.

It’s easy to get caught up on all of the information that is telling you what your budget should like. My solution – don’t pay attention to any of it. Don’t compare your budget to anyone else’s. Your life is unique, which means your budget is going to be unique as well.

It’s also easy to write down numbers we WISH we could stick to rather than the actual dollar amounts that are leaving our wallets or checking account.

For example, if you write down $300 for groceries every month because that’s what you THINK you should be spending, rather than the $500 you are really spending, you will fail every time.

Be honest about what’s happening with your money, even if it seems like a massive slap in the face.

• Read: Should You Budget Your Money Using Percentages?

Here are the action steps you need to take to make sure your budget is realistic:

1. Gather ALL of your financial statements.

Stop winging it. Stop guessing about the numbers. Take the time to gather your pay stubs, bank statements, investment accounts, and bills.

2. Figure out how much income you have coming in.

Make a detailed list of all money coming in. List every single source. Income might include your regular salary, any guaranteed bonuses, child support, etc.

3. Know your fixed expenses.

Your fixed expenses include your regular recurring bills and taxes. Fixed costs don’t change from month to month and include things like your mortgage/rent, utilities, insurance, and debt payments.

Look at your financial statements. What bills are you paying every month? These are your fixed expenses.

You also need to make sure you are paying yourself first. That means savings should also be included in your fixed expenses.

4. Estimate your variable expenses:

If you have money left over after paying all of your fixed costs, you have what’s called discretionary income. This is the income you need to use for things that vary from month-to-month. Variable expenses include things like groceries, gas, clothing, eating out, entertainment, and coffee.

To estimate these costs, analyze your bank statements and see how much you are spending on these types of expenses. One way to do this is by using highlighters.

If I want to know how much I am spending on groceries every month, I look at my bank statements and highlight all transactions that are related to groceries with a green highlighter. Once all transactions are highlighted, I total them up. I do this with all line items on my bank statements.

• Read: 5 Critical Questions You Need to Ask Yourself Before Creating a Budget

For example, all gas transactions are highlighted yellow; all clothing purchases are highlighted in blue, all coffee transactions are highlighted in green, all gas purchases are highlighted with pink. Once all transactions are highlighted in different colors, I add up all the pink transactions, all of the blue transactions, etc.

I do this for a couple of months worth of bank statements. This will give you a good idea of how much you are spending on each of these categories. I then average out the numbers, and that’s what I use for the number on my budget.

By doing this, the numbers don’t lie. You are no longer using a fictional number or guessing at the values.

BUDGET FOR LONG-TERM EXPENSES

It’s easy to overlook items you only have to pay once a year. Things like your car insurance, medical and dental insurance, or property taxes are usually outside your regular routine and can be slightly unpredictable.

There are usually some saving benefits if you pay for these expenses every year or six months rather than every month. So what are the action steps you need to take to make sure these bills aren’t forgotten?

1. Look through your records or past statements to see how much money you spent the previous year.
2. Take that amount and divide by 12. This is the amount that you need to set aside every month to pay the annual bill. If it’s a bill you pay every six months, like your car insurance, divide the amount by 6. (For example: If you spend $600 per year on car insurance, your monthly budget is $50 per month.)
3. Make sure you add your monthly amount to your budget and treat it like a regular expense.
4. Move that money every month into a savings account that’s specifically marked for that bill (in this case, the savings account would be listed as “Car Insurance”)
5. If you are having trouble opening a savings account for each long-term expense, you could always withdrawal the money from the ATM and keep it in an envelope or jar marked for that purpose. (Just be sure to stash it somewhere safe and out of sight, so you don’t spend it!)

DON’T BE AFRAID TO MAKE CHANGES

I can almost guarantee that the first budget you create is NOT the one you will actually use. For me, it took nearly six months to find numbers that worked for my budget and life.

If your budget is making you more intentional with your money and is giving you signs of progress, then it’s working. If you are constantly going over budget or finding new expenses that aren’t accounted for every month, then maybe it’s time to look at it again and make necessary changes.

I suggest scheduling time in your calendar to check in with your budget and expenses at least every month. This is at the minimum. You should have some system in place where tracking your expenses and spending is a daily occurrence.

So what are some signs that your budget might not be working?

• Read: Have Irregular Income? Here’s How to Budget for It.

If you get to the end of the month and you had to dip into your savings to make ends meet, it might be time to revise your budget. Being in the negative every month is a glaring signal that changes need to be made. Can you cut back in other areas of your budget to save some money? This is where tracking your spending every day is crucial.

A few dollars on coffee every morning might not seem like much at the time, but the monthly number can be huge and make a real impact.

Can you cover unexpected expenses such as needing major car repairs or replacing a broken appliance? If your budget doesn’t allow you to save some of your take-home pay for emergencies, there might be future financial trouble. Emergency savings is key to a healthy budget, and it needs to be included in your monthly expenses.

I suggest saving at least $1,000 for emergencies. Just keep in mind, that’s the amount that lets me sleep at night. I am comfortable with that amount. Come up with a number that makes you feel secure, and start setting aside monthly amounts to reach your goal.

Budgeting is all about trade-offs. If you spend more on entertainment, that means you have to spend less on groceries. Are you constantly going over in one category? Maybe it’s time to sit down and adjust your spending.

Do you need to cut back in one area so you can spend more in another? This is where I struggled the most. For me, this is what took the longest to figure out. Finding that sweet spot where your values for your categories reflect what’s happening in your life might take some time, and that’s OK.

Did your financial goals change? Are you looking to pay off your car or student loans? Maybe you want to buy your first home? Any time there is a significant change in your financial goals, you need to sit down and take a hard look at your budget.

For example, if you spent the last five years paying off student loan debt and you finally accomplished that goal this year, you need to sit down and decide where that money needs to go now that it’s not going towards student loan payments.

Maybe your new goal is to buy your first home. Instead of putting all of that debt towards student loans, it now needs to be put towards savings. This will change the amounts in your budget and where money needs to go to reach your new financial goals.

Not paying bills on time. If you are consistently late on bill payments, it might be time to rethink HOW you are budgeting your money. Late payments are not always a result of not having enough money. Sometimes, it’s an organization issue. Try using a bill calendar with your normal budget. This is an organizational tool that completely changed my budgeting method.

Budgeting for the sake of budgeting will never be enough. Trust me, I know. You have to be willing to do the work for your budget to make a severe impact on your life. Analyzing your spending, adjusting your budget when needed, and knowing the warning signs that’s it just not working are all things that need to be addressed for your budget to be realistic.

Make sure to use the action steps mentioned above to make your budget the most crucial financial tool in your life. It might take weeks or months of adjusting and fixing, but once you find the method that works, it’s all worth it!

What are some of things you have done that made your budget more realistic? Share them with me in the comments below!