This time it’s going to be different. You’re going to create a budget… and stick with it!
Only, it’s never different. Time after time you’ve tried to get your finances under control, and time after time you’ve failed.
But what if I told you that there were two tricks that you could use to change that?
By making these two small shifts, you’ll be able to stick with your budget and meet your financial goals.
Not only are these tricks super easy, but they will work for any budget.
“Will these tricks work for low-income families?” Yep!
“What about if I just want to save more of my money instead of blowing it?” Yes!
“But we are a single-income family, can it really work for us too?” Definitely!
We’ve been using these tricks since we got married and were living on one very low income. We used it when we were both working outside the home. And we continue to use it today as a single-income family with two kids.
So I would bet you money that it will work for you. 😉
It all comes down to a mental shift
Most budgeting problems can be solved by two tiny little mental shifts.
“Really, Kassy? That’s all it takes? Changing how I think?! That seems too simple.”
I wouldn’t have believed me either, if I hadn’t tried it! But stick with me and you’ll see how this works:
The Two Important Paradigm Shifts for Success
1) Think of your budget in terms of percentages instead of dollar amounts.
When most people start budgeting, they go straight to the numbers. They don’t bother looking at what percentage of their money they are spending, saving, or giving.
They think that the numbers in their budget are fixed and unchangeable. So they let the numbers control them.
Here’s where the shift takes place: If you decide the total amount of money that you can spend on expenses before you begin your budget breakdown, you are in the driver seat.
Not only does using percentages put you in charge, it will allow your budget to work on any income.
2) Reverse the way you allocate your money.
Most often, when people are looking at their numbers, they look at their expenses first.
What’s left after all of the expenses have been met is saved.
And if there is anything left over after that, then they give.
If you have an unlimited pool of money for any and every expense you want, your expenses will grow until they drain the pool.
There will never be anything left for savings, and there will never ever be anything left to give.
If saving, paying off debt, and giving are important to you, you must allocate your money in reverse!
So how do you change these habits?
With a little bit of math.
First Things First
If you are new to budgeting, I need to quickly go over a small detail: Gross Income vs. Net Income.
This little distinction will save you so much frustration!
Never, under any circumstances, base your budget off of your total salary or hourly pay.
If you do this, you will be frustrated every month because you will never have enough money to cover your expenses.
It just won’t work.
(If this is boring or obvious to you, go ahead and skip down to How to Use Percentages, I won’t be offended.) 🙂
Your gross income is your total salary or paycheck before taxes.
This is what your employer tells you that you make. But let’s be real, you don’t actually see that amount of money.
If you base your budget off of your gross income, you are making a huge mistake and setting yourself up for lots of frustration and probably failure.
The only time you should worry about this number is when you are job hunting.
Net Income is commonly referred to as take-home pay, or what you make after taxes.
When you are building your budget, you can obviously use any percentages that you want… It’s your money after all!
But I’m going to show you the percentages that we have used (and still use) on a variety of income sizes in our almost 10 years of marriage.
These percentages will work if you are just starting out, paying off debt, or have plenty of money coming in!
The 70/20/10 Rule
The 70/20/10 rule is going to give you the most basic structure for your budget.
You’ll decide the total amount for every single item on your budget once we get this structure set up, but be careful not to needlessly increase your expenses as your income grows.
For example, you don’t need to increase your food budget just because you make a little bit more money.
Giving yourself a broader outline allows for you to make adjustments and add things into your budget as needed, without needlessly growing the amount of money you spend on transportation or housing, for instance.
Here’s how it works:
Expenses (Everything it costs you to live): 70% of your income (Take-Home Pay)
Savings/Debt Payment: 20%
Let’s get into the details:
When you use the 70/20/10 Rule, your expenses should be less than or equal to 70% of your net income. Never More.
Expenses (<) or (=) 70% of Net Income (Salary-Taxes)
How do you know what 70% of your Net Income is?
Take your Net Income and multiply it by .7. The answer is 70% of your net income.
Example: For easy math’s sake, let’s say your Take Home Pay is $2000 per month.
$2000 (x) .7 (=) $1,400
In this example, $1,400 would be the maximum amount of money you can spend on expenses.
Debt Payment and/or Savings: 20%
The next 20% is allocated to Debt Payment and/or Savings.
Debt Payment/Savings (=) 20% of your Net Income (Salary-Taxes)
So if our take home pay is $2,000 a month. Our Debt Payment/Savings amount would be:
$2,000 (x) .2 (=) $400
If you don’t have any pressing debt, this money goes directly into savings.
If you are just starting out, begin by building up an emergency savings account (check out this post for how many savings accounts you should have to easily manage your money).
How to Handle Debt:
If you have any debt, your first order of business is to get rid of it! Preferably as quickly as possible.
Use this 20% of your income as additional payments on your debt until the debt is gone. Then go back to putting this money in savings.
Notice that I said additional payments. Your car payment(s), your student loan payment(s), and your mortgage should all come out of your expenses. This 20% of your income is for extra payments!
I’ve found that everyone has different logic as far as good debt/bad debt qualifications. You have to decide for your family what is important for you to pay off.
But here’s the thing, any debt that you can pay off is more money that you will have at your disposal each and every month from now until eternity.
Yep, it’s true.
Think about it:
Every car payment you make could actually be going into a savings account for that amazing family vacation you’ve always wanted to go on.
Every credit card payment could be saving for a kitchen remodel.
Every student loan payment could be allowing you to stay home with your kids.
Here’s How We Handle Debt:
Like I said above, you have to choose what debt is worth it to you to pay down.
In our family, these are the types of debt we would pay off quickly: (And when I say quickly, I mean we throw every bit of money we can find at it until it disappears.)
Debt We Paid/Pay Off Quickly:
A lot of people consider student loan debt to be good debt. We didn’t.
We did the math and realized how much extra we would be paying on our loans if we made the minimum payment every month for years on end.
We paid off our loans as quickly as we could and saved ourselves thousands of dollars in interest.
That’s a lot of mulah that we now get to keep in our pockets!
Paying off our student loans is one of the main reasons I am able to stay at home with my girls without having to worry about making a full-time income.
A lot of people think that having a car loan is a fact of life. Again, we don’t.
We only purchase cars that we know we can afford to pay off within a year. Worst case scenario, we know we can do it in two. Then we drive that car until someone else totals our vehicle… It’s happened twice now.
Not having a car payment is another reason that I am able to stay home with my girls. So it’s worth it to us to pay our cars off quickly. Then to drive them until they die.
Credit Card Debt:
Credit Card Debt Payments would belong in this category as well.
If you tend to get into debt using credit cards, pay the debt off quickly… after you cut the cards up and throw them away.
Don’t get any credit cards again until you have all your debt paid off and have a handle on your spending.
We make money off of our credit cards because we only use them when we know we can pay off the balance at the end of the month… then we take the rewards to the bank!
The reason we chose to pay off any debt quickly was that we had a goal of becoming a single-income family when we had kids. Not having debt gave us the freedom to do that.
Pro Tip: If you can pay extra money, make sure every penny is going against your principal amount only and not toward the interest on the loan. You will pay it down a lot faster that way!
Don’t just make double loan payments when you’re paying off debt!
Debt we don’t pay off quickly:
The reason that we aren’t paying off our mortgage quickly is that we were transitioning to a single-income household when we purchased our home.
While we were careful to purchase a house that we could afford on one income, it would be a big stretch for us to make additional payments on our income.
Even if we were able to make extra loan payments, it would still take us a very long time to pay off our house.
For us, it was more important to spend the money that we would have been using to pay off our mortgage on swimming lessons, music lessons, and a family vacation here and there.
But if you can afford to pay off your home and it is a priority for you, go for it!
You need to evaluate your debt for yourself and your family. Pay off what you can, and make your regular payments on the rest.
In our family, we tithe 10% of our income to our church.
If you don’t belong to a church, or you don’t want to give to your church, there are other things that you can do with this 10%.
Give to a charity, find a cause, or help someone pay for college… Get creative and give back.
No one ever regrets giving to charity and making the world a better place.
Obviously, you aren’t required to give any of your money away, it’s your money.
But I highly encourage you to do something with the money that is bigger than yourself, even if it is just putting the money into a college savings account for your own children.
For our $2000 net income example, we have been using, the charity amount looks like this:
$2,000 (x) .1 (=) $200
Gross Income vs. Net Income Giving
Now, remember when I told you that you could give off of your gross income (your total salary) instead of your net income (your take-home pay) if you wanted to?
Some people, ourselves included, choose to give this way.
(Don’t worry, I’m not going to try to convince you to do this. You should do whatever seems right to you.)
But I wanted to walk you through the process in case you wanted to give this way as well.
Your numbers won’t work out beautifully if you do this. You can’t give 10% of your gross and still expect to spend70% of your income on expenses and 20% of your income on savings.
Something else will have to give.
If you choose to give 10% of your gross income, I suggest you take the extra giving out of your expenses instead of your savings.
Here’s How You Do The Math:
Calculate your Giving:
10% of your Gross Income in this scenario
Calculate your Savings:
20% of your Net Income
Use the Remainder for Expenses:
For us, this works out to be about 67% of our net income for expenses.
If you prefer to use the nice round numbers of the 70/20/10 rule, you will have to do everything based off your net income.
Now Think in Reverse
Each month when you allocate your money into each category, I want you to do it backward!
1) Give First
Take your 10% of each paycheck and make a payment to your church, charity, cause of choice, or college fund.
Do this before you do anything else!
Why do we give first?
If we wait until the end of the month and give last, there won’t be anything left to give. Everyone is naturally selfish and if we don’t set aside the money that we want to donate, then there won’t be anything left at the end of the month.
Money has a way of sneaking away undetected if we aren’t intentional with it.
2) Pay off Debt and Save Second
The same logic applies here. If you don’t pay yourself next, you won’t get around to it!
Twenty percent of your income won’t be magically sitting around at the end of the month waiting to be saved.
Have your money auto-draft to your savings account or have an automatic loan payment set to go out the day you get your paycheck (or the day after you get paid, just to be safe, you don’t want to overdraw.)
Pretend that the money never existed!
3) Use the Remaining 70% or less for your Expenses
Now that the important stuff is out of the way, use your remaining 70% to live on.
The last thing you really want to spend time doing or thinking about, right?
We all know we should do it, but it’s usually the last thing we get around to.
It’s like the vitamins of home management.
Here’s the thing though, budgeting can actually be fun!
I feel like you don’t believe me, so let me show you:
Wouldn’t it be fun if you could afford to take that trip you’ve been dreaming about?
Wouldn’t it be fun if you told your money where to go instead of credit card debt bossing you around?
And wouldn’t it be fun if at Christmas time, you already had the money saved up for gifts instead of digging yourself into a financial hole?
Budgeting can make all that happen!
Yes, it takes some time, some effort, and some grit to stick with it.
No, it isn’t easy at first.
But when you pay off that first debt, when your savings account starts growing, and when you stop spending money on things that you don’t need, it is all worth it!
Before we get into the HOW of building a budget, let’s take a quick look at WHY you should start a budget, in case you still aren’t convinced.
Or if you’re ready to get started, just skip the next section. 🙂
And if you prefer to watch your content instead of read it, here is the video that goes with this post:
Why You Should Start a Budget
1) You Will Get Your Spending Under Control
If you spend more than you make each month and money seems to magically disappear between your paychecks, starting (and sticking with!) a budget will help!
When you have your money allocated to where it needs to go, you know exactly how much money you have left over to play with each month.
Basically, it keeps the money from getting confused as to whether it is fun money or serious money.
Creating a budget will help you see exactly what you are spending your money on… and see if you need to make any adjustments.
Having Netflix, Hulu, and Amazon Prime may be nice, but would it be better if you could afford better gifts at Christmas time if you only subscribed to one entertainment hub?
2) You Will Reach Your Goals Faster
Do you have a trip you want to go on? A car you want to purchase or pay off? Are you thinking of purchasing a house and need a down payment?
Start that budget!
By laying out exactly how much money you need to save and dividing it up into nice manageable chunks that you can save each month, you will reach your goals more quickly.
3) You Will Save More Money
Putting your money toward an emergency savings account or retirement can be a challenge when you are budgeting based on your feelings every month.
Going out to eat will always win over putting that money in an account when you don’t have clearly defined goals.
But when you write down your goals on paper, and auto-draft directly into your savings account(s), you will start to build a nest egg for when you need it.
4) You Can Stop Living Paycheck to Paycheck
Living paycheck to paycheck is frustrating and stressful.
No one enjoys living that way without any financial cushion.
Knowing exactly where your money should go each month will give you the courage to say, ‘no’ to things that aren’t in the budget so that you can begin to build in some wiggle-room.
5) You Can Be Flexible from Time to Time
Sometimes, the kids will need a whole new wardrobe, and usually they all need it at the same time.
If you have a budget though, it’s not a problem!
Just eat cheaper foods for a month, or cancel some subscriptions, or put a little bit less into the college savings accounts.
If you know how much money goes everywhere each month, you can easily move things around temporarily if need be, without completely throwing things off track.
6) You Can Get Back in the Driver Seat
Sometimes it can feel like your finances are in control of you, especially if you are in debt.
By creating a budget, you are back in control.
You can allocate where every bit of money is going and know when your debt will be paid off if you stay on track.
7) Having a Budget Keeps You Accountable
Building a budget, is like having a financially savvy friend who will say, “do you really need to buy that cart-full of things at Target? Or have you already spent your shopping budget for the month?”
It may not be what you want to hear, but you know that your friend is right.
Sometimes it’s just what you need to kick your finances into gear.
8) Having a Budget Simplifies Your Finances
Even though it seems more complicated at first, once you get the hang of it, it will make your finances simple.
Especially if you use my simple percentages trick that I talk about in this post, you will be amazed by how easily you can keep track of your money.
You will know where every dollar is going and never wonder why your credit card bill is so high again.
9) Money Will No Longer Get “Lost”
Have you ever put money in your bank account and had it “disappear” less than a month later? You aren’t even quite sure what you spent the $100 you got for your birthday on, but it must have been something, right?
Having a budget and sticking with it will keep you from spending your birthday money at the Taco Bell drive-through and enable you to use it for something fantastic. (That’s never happened to me by the way…)
How to Create a Budget:
Now that we all understand why creating a budget is so important, let’s go through the simple steps for creating a budget!
1) Grab Your Gear
We are kind of spreadsheet junkies. We have a spreadsheet for everything… from every board game that we own, to our Christmas card address list.
So for us, it’s a no-brainer to grab our laptops if we are looking at our budget. We like to use Microsoft Excel for all of our spreadsheets, and I built aMoney Mastery Google Spreadsheet to get you started on the right foot if you’ve never used spreadsheets before.
The advantage of using a spreadsheet for your budget is that you can easily change the numbers if anything changes without having to completely re-do the math.
If you use the formulas, the spreadsheet does the math for you!
But if paper and pen is more your style, it is also a great way to build a budget. You can grab my Money Mastery Printable Workbook if you would like an easy plug-and-play template.
2) Determine Your Reliable Monthly Income
Take your income after taxes, your spouse’s income after taxes, and any other consistent incomes that you have (after taxes!) and add them all together.
The sum of the net incomes is the amount of money you have at your disposal every month.
Notice that we aren’t looking at every bit of money that you *might* make in a month.
What you want to know is what will absolutely be at your disposal.
Be very sure that you are not looking at your Gross Income. That number is quite different than the cash flow you will have available after all of your deductions are taken out.
I used to make a specific recommendation for how much money you should spend on your budget ($100 per person/per month).
BUT in this video I talk about how food costs have gone up since COVID. I now think that you should try to set your food budget as low as you can while still making tasty, healthy meals for your family.
Adjust the number according to your geographic location (I know some places like Hawaii are much more expensive to buy groceries), and your eating preferences (or dietary restrictions). But don’t be afraid to challenge yourself with spending less money!
When you are all done writing down everything you spend in a month, add up all your expenses. Are your expenses 70% or less of your net income?
(If you aren’t sure what 70% of your net income would be, simply multiply .7 by the total net income that you came up with in Step 2. Then compare your answer with the total expenses.)
If you are spending more than 70% of your net income, you are probably going to need to cut some costs in order to be able to save money or pay off debt depending on your goals for creating this budget. We’ll, take a closer look at this later.
Why divide your expenses into two categories? I thought you’d never ask!
After doing all the math. you may find that you don’t have the money to put into savings that you would like to. Or you may be looking to pay off your debt quickly but aren’t sure how you will do that. Or you may want to save for a trip. Or you may find that you are spending more than you make and are getting deeper into debt…
If that is the case for you, then you will probably be looking at cutting some expenses (after you track your spending for a month in Step 8). Dividing your monthly expenses into these two categories will make it easier to see what you can live without.
Everything you put in this category is a non-negotiable expense for your family. You won’t be able to minimize or cut out these expenses without moving or drastically changing your eating habits.
Common things that you may have in this category are Rent/Mortgage, Utilities, Debt Payment, Cell Phone Plan, Groceries, Car Payments, Car Insurance, Home Insurance, Health Insurance, Life Insurance, and Gas.
Now jot down everything that is a typical monthly expense that you can either spend less on or cut out completely if you need to.
This is the list that you can work from if you realize that you need to make some adjustments.
It’s hard to minimize necessary expenses (although not impossible if you are willing to put in some work), but unnecessary costs can easily be shrunk, skipped for a month or two, or completely eliminated if you are in a less than ideal financial situation.
Things that could possibly go in this category: Clothes Shopping (most of us don’t need as much as we think we do), Miscellaneous Shopping, Entertainment, Going out to eat, Television/Cable/Dish, Netflix, Hulu, Amazon Prime Subscriptions (even though Amazon wants us to feel like Prime is a necessity).
You’ll be surprised how easily you can live without so many of these things!
5) Allocate Your Savings/Debt Payments
Why is this section about Savings and Debt Payment together? Because if you have debt (other than a mortgage), pay it off before you start putting money into savings.
Once the debt is paid off, you use the money that you had been putting toward your payments and start putting it into your savings accounts.
If you try to save while you are paying off debt, you won’t make progress with either of them very quickly and will probably get discouraged before you are done.
But if you pay off your debt first, you are able to put moremoney toward your debt and pay it off faster. Then your savings will grow more quickly when you can put all of that money toward savings.
For this step, you should decide what percentage of your income you would like to save or put toward paying off your debt.
In our budget, this category accounts for 20% of our net income. When we had/have debt, we use this chunk of money to pay it off. When we don’t have debt, we save 20% of our income.
What To Do With Savings:
Instead of dumping your savings into one giant catch-all savings account, I suggest dividing it up among several different accounts.
The main reason for this is that it is much easier to track the money we have saved for different items or experiences without dipping into our emergency fund.
If you decide to have several accounts for your savings, I recommend using a separate tab in your spreadsheet to keep everything straight.
Here are some savings accounts that we have and I would recommend to anyone that they apply to:
Emergency Savings Accounts: This account is for emergencies such as a job loss or a medical need. Don’t touch it unless you are in a crisis. It is best if you can pretend this account doesn’t even exist.
Set up auto-drafting for this account on the day that you know you get paid.
It is a good idea to have 6-12 months of living expenses stored in this account. If you are just starting out and don’t have a savings account yet, put the entire 20% of your income into this account until you could live off of this account for at least 6 months if you needed to.
Big Goal Account: If you know that you plan on purchasing a house, boat, car, going on a trip, or paying for a wedding; it is a great idea to save money ahead of time.
Putting all your savings into one account can make saving for a goal messy. By having a separate account, you know exactly how far you are from your goal.
If you have more than one goal that you are saving for at a time, open two accounts! Opening accounts won’t hurt your credit or cost you anything as long as you maintain the required minimum balance.
Investments: It is a good idea to put money into investment accounts for retirement needs. Often long-term accounts will have higher interest rates than your run-of-the-mill savings accounts.
We use Edward Jones to keep track of putting our money in the highest yielding investments so that we don’t have to watch the market so closely.
Sinking Funds: These accounts are what we use to save for expected hits to our bank account. For us, this is mainly our cars and insurance.
We use Progressive Insurance and with them, we can save money by paying yearly for our insurances instead of every month.
To avoid a financial surprise once a year, we divide the total amount we need to pay into 12 smaller payments. Each month, we put 1/12 of the money into an account. When our premium is due, we have the cash available.
We also use our sinking fund for car repairs and oil changes. Ross averages out what we need for these each year and puts the money away to take care of the vehicles… plus a little extra since car repairs can come at a premium and usually happen when you least expect them!
College Savings Accounts: Each month we put a little money into two college savings accounts. One for each of our girls. Any time Ross gets a bonus from work, we also put in a little extra.
Most likely the accounts won’t completely pay for their college educations, but it will give them a nice start when the time comes.
Considering the time value of money, it is best to start these accounts as early as possible when you have children.
The accounts that we use for our girls are for education only. The upside of that is that they have a higher interest rate than a regular savings account. The downside is that they can only be used for trade schools or college.
So if neither of our girls decides to go to college, we will have to transfer the money to someone else who wants to use it for education. This is worth it to us because we figure that worst-case scenario we could give it to a niece or nephew.
If you want more ideas for setting up different savings accounts, check out this post!
6) Determine Your Giving
You can obviously skip this piece of the puzzle if charitable giving doesn’t align with your personal values.
But if you’ve never done it before, I encourage you to give it a try!
It’s ok to start small here, even donating $25 a month to a cause can go a long way. Just eat at home once or twice more per month instead of eating out and it will cover the cost.
Even if you aren’t part of a church, it never hurts to giveback to your community. Find a cause or a charity that you are passionate about.
I’ve never heard of anyone who regretted paying it forward!
If you really can’t afford it, volunteer once a month at a homeless shelter or soup kitchen in your area!
There are a million ways to give back if you get creative.
Plus volunteering will teach your children the importance of helping those less fortunate than yourself and treating everyone with respect.
In our house, we tithe 10% of our income to our church. (See this post for more information on recommended budgeting percentages.)
Additionally, we like to donate to ADRA which supports people who live in less fortunate areas of the world or who are in difficult situations.
We like to get the kids involved in choosing how we donate and they often like to pitch in by asking for donations for Christmas and birthdays. This year we bought a goat for a family who needed food and a way to make money.
7) Create a Calendar for Your Budget
Sit down with your calendar (I love this Amy Knapp Big Grid Calendar) and write in your paydays. Now, choose which payday you will have your expenses auto-drafted.
For example, We have our mortgage payment taken out on the first of the month with the first paycheck. Because of that, we have most of our other expenses drafted after the other paycheck hits our account.
That way we have plenty left over for groceries and gas in between paycheck one and paycheck two.
After you have your expenses divided up, decide when you want your savings or debt payments auto-drafted. You may want to do this all at once, or a little bit from each paycheck.
Having this money taken out automatically tricks your mind into forgetting about it!
The other thing you should write down on your calendar is your weekly grocery budget.
Divide your monthly grocery budget by 4 and write it down. It is much easier to stay under budget when you know how much money you have to spend each week at the grocery store, instead of trying to remember the monthly amount.
8) Track Your Spending
Alright, now that you know where you want your money to go each month, it’s time to find out where it is actually going each month.
If you needed to cut some costs, track your spending for another month. Then see if the initial things that you cut out of your budget were enough for you to meet your goals.
If you are still spending too much, keep repeating steps 8 and 9 until you get where you want to be!
If you find yourself struggling to stick to your budget, you may want to use a cash system until you have your spending under control.
But I don’t recommend using a cash system in the long run because you can build credit and make money by using credit cards… if you use them wisely.
Using a cash system is a great way to reset your spending if you need it, though!
11) Stay On Top of It
Once you have honed in on your perfect budget, don’t just forget about it. Check your budget regularly against your bank accounts to make sure you aren’t overlooking any spending.
We love using Mint.com to stay on top of our money. It saves lots of time, and it’s free!
I recommend checking at least once a week, but it doesn’t hurt to check daily while you are getting into the habit. Or you can be super-cool like Ross and check multiple times a day from now until forever.
I always play a game with myself whenever I buy anything other than groceries to see how long it will be before I get a text from him confirming that I did indeed purchase whatever it was from wherever it was.
It used to annoy me until I realized that’s one of the reasons we have been able to live debt free for so long… and it was a helpful habit to have when someone stole our credit cards…but that’s a whole other story!
The important thing to remember is to check frequently, whatever frequently means to you!