How to Set a Realistic Budget
I was an accounting major in college, and my curriculum was devoid of any true personal finance education. That’s baffling, right? (Yes.) We would be doing future adults (aka, literally everyone) a service by integrating personal finance into school curriculum, so I’m here to be that Personal Finance 101 class you were never offered.
While it would have been WAY more fun to write an article about the best credit cards to use for travel hacking and which tax-advantaged savings methods I used this year (which will eventually be written, BTW), I realize that a lot of people are still stalling at the starting line.
Consider this article your proverbial life raft - I’m here to help. If you can’t tell me how much you spend and save (ish) in any given month right now, then this article is for you.
Step 1: Bring Awareness through Expense & Income Tracking
The stock market can do nothing for you if you have nothing to put into it. Forget all fancy money buzzwords for a sec, and let’s start at the beginning.
I was never a big budgeter. I live with major buyer’s remorse and grew up with a very healthy respect for the almighty dollar. I was always confident I wasn’t spending more than I was making, so why did I need to see it written out? Because tracking your expenses gives you an understanding of where your money is going. Understanding where your money is going can help you take advantage of excess cash flow and/or fix bad habits.
How to get started
I encourage you to track your expenses closely for two - three months before you attempt to set any sort of budget. (Impatient? Pull old credit card & bank statements instead.) Gaining an understanding of your average spending allows you to set realistic budgets that will help you maintain good spending habits or curtail those that tend to stifle your savings.
There’s also an app for that.
I cannot recommend Copilot enough. It is the most user-friendly and intuitive budgeting and expense tracking app on the market and has totally reinvigorated my love for this practice. It is a paid app, but you can try it for free for one month by downloading the app here and by using the code ‘A6M9T6.’
*By using my code, you get a month free, and I get a month free. If you don’t want to use my referral code, no biggie, but do yourself a favor and get the app regardless. I’m not paid to say this - I just love it.
Here you can see how Copilot categorizes each of your transactions for you. You can easily recategorize each transaction on an individual basis or retroactively/proactively.
Step 2: Create reasonable monthly expenses
After you’ve tracked expenses and have a clearer picture of the average amount spent by category, by month - let’s make sure that spending is reasonable before you use it as a benchmark, aka - a budget.
Total your monthly income and monthly expenses.
Did you make more money than you spent in any given month?
If the answer is no - Total Income - Total Expenses = < $0
You are over spending. Stop here, review your expenses, and ID the top contributors. Brainstorm ways to cut back on non-essential spending so that income exceeds expenses.
If the answer is yes - Total Income - Total Expenses = > $0
Fantastic! BUT, If the answer is yes only because you got a recent bonus or gift, take that amount out and reassess. You don’t want to factor non-recurring income streams!
Create Reasonable Budgets by Category (based on good data)
Ask yourself: Is the spending in each category reasonable?
Example - Restaurants. Let’s say you spent $165 on restaurants in a month, but you have no idea if that’s high or low.
Restaurants serve food, right? Maybe compare that amount to your Grocery spending. When I was single, I budgeted around $300 a month for groceries. Groceries were my primary source of food, and I expected to eat out only a couple of times per week.
How to determine reasonability - If I’m eating out for less than half my meals per month, I don’t want my restaurant spending to be more than 50% of my grocery budget.
$300 x 50% = $150
$150 is a reasonable spending amount. I wouldn’t break a sweat over $165, unless you’re living paycheck to paycheck. If you’re comfortable with this number, then $150 - 165 is your budget. If you think it’s too high, set it lower & challenge yourself to eat out less (or eat less when you eat out.)
Ask yourself: Was there a one-off expense included in the monthly expense amount?
Maybe you bought your friend’s meal on her birthday, and the expenses are way up for your restaurant budget in the month. Exclude that one-off amount from your budget, because that’s not something that you would expect to recur monthly.
Step 3: Consider less frequent expected expenses
Immediately a few of mine come to mind:
insurance (paid annually)
prescriptions/supplements (paid quarterly)
pest control (paid bi-annually)
estimated tax payments (paid quarterly).
Yours may look a little different, but you have to consider these types of expenses, too!
Copilot ALSO has a recurring expense feature that predicts these payments by analyzing past spending. It will automatically factor the expected costs into your budget in the month they are due. Pretty cool, right?
Don’t have co-pilot? You can also estimate when these less frequent expenses are set to hit by referencing past credit card bills or bank statements.
Step 4: Consider savings & investing goals
Depending on where you are in your budgeting journey, these may not exist (yet!). If you have something specific you’re saving for like a downpayment on a house or car, then ensure you’ve included a savings line item in your budget.
Sometimes this isn’t a set amount. For example, I transfer any money in excess of $5,000 from my checking to investment accounts at the end of each month. This amount is variable, because I’m not saving for anything in particular. I’m just focused on long term growth.
Step 5: Stick to your budget (creativity is welcome)
Once you’ve gone through every category and have an idea of what your spending (and saving, if possible) should be each month, then it’s time to stick to it!
I physically log my expenses in a budgeting spreadsheet I made so that I can analyze trends throughout the year, but Copilot provides a month in a review dashboard that requires no additional work on your end.
Easier said than done? Get creative.
Life comes at you fast. Not to be morbid, but none of us know how much time we have on this earth with people we love. If you’re turning down QT with friends because you’re scared of tipping your restaurant budget - maybe try forgoing the “apps and ‘serts” rather than skipping the experience altogether. Life is about balance - and that includes your budget. Which is a great segue, if I do say so myself, to flexible spending.
Or, look at your budget holistically
Copilot has a feature that allows you to “re-balance” your budget with the click of the button. Let’s look at this example:
It’s January 28th.
Monthly Car Budget: $100
Amount spent so far this month: $40
Amount leftover: $100 - $40 = $60
Copilot analyzes your budgets and reallocates the leftover $60 to a high spend budget category to give you more wiggle room.
Tracking your spending meticulously by category is great if you’re really trying to cut back in certain areas, but for someone with a very reasonable/low spending habit, you can also look at your budget holistically to assess whether or not you’ve spent reasonably in any given month. So what are you waiting for?