One of the books I have read in my life is a book called “The Total Money Makeover” by Dave Ramsey. This book is all about money management and it contains really valuable lessons about different kinds of personal finance topics, to name a few budgeting, how to cut spending, how to pay debts fast (I will write a blog post about this), and much more.
One of the things that I didn’t pay attention to was the importance of budgeting in personal finance. I was spending just like anybody, without even realizing where my money has gone, and at the end of the month I am just wondering why I don’t have any money left. Does this sound familiar to you?
When I read The Total Money Makeover book I understood how important budgeting is if you really want to manage your finances and how much it can really affect your journey to financial freedom.
This is why I wanted to share some of the knowledge I learned and I want also to show you how I have managed my budgets since May 2015 and was able to cut my spending since then. I know it has been a long time ago since I started it but at least I have over 8 years of experience that this method really works.
What is budgeting?
Budgeting is a process where you write down all expenses and money you get (income), and allocate a specific amount of money for each expense in order to keep track of your personal finance. Budgeting is one of the essential things that need to be done in order to get a real picture of personal finance. It is easy to do and I will show you an easy way how you can do it right now.
Why budgeting matters?
Budgeting matters if you really want to save money, able to grow your wealth, build a habit of not overspending and achieve financial freedom. It’s a very basic skill yet very valuable to learn.
What benefits does budgeting have?
- With budgeting, you are able to allocate a specific amount of money to some specific expense
- able to track your personal finance
- gives you the real picture of your personal finance
- gives you the ability to plan your budget before the next period starts (weekly, monthly)
- teach you discipline of not overspending
- teach you a habit on how you can easily manage your personal finance
- gives you the ability to teach others to manage their personal finance
How to do budgeting?
Budgeting is very easy to do. You can do it right now in either format; physical (journal for example) or digital (Google Sheets). The earlier you start the better.
| Budget for January 2023 | ||
| Last updated: 01/01/2023 | ||
| Income | $5000 | |
| Expense name | Amount | Spent |
| Food | $400 | $450 |
| Electricity | $300 | $300 |
| Mortgage | $1500 | $1500 |
| Gasoline | $300 | $550 |
| Total | $2500 | $2800 |
| Budget left | $2200 |
As you can see it’s very simple. Now let’s go through it step-by-step to fill it even though it might sound self-explanatory.
- Write in the heading “Budget for <month> <year>” so that you know to which month this budget is related. In our example, it is January 2023.
- The next line is “Last updated“, here you would write whenever you would update this budget. The idea here is to keep you updated on when you did update this budget so that you are aware if it is in need to be updated or not. My rule of thumb is quite simple when you have a new expense or need to update one, write the date when you are about to make the update and make the update.
- Then we have “Income“, here you would type ALL income you get for the month, whether it be salary, parking lot rent payment, rent payment, or whatever it is. This income is something that must be paid for you in your account or cash on that specific month. You can’t for example count investment in it unless you withdraw that money from your account. You get the point 🙂
- Now comes the interesting part, “Expenses“. Here you would write all expenses you have for that month.
- Write the expense name in the “Expense name” column,
- then under the “Amount” column, you would write how much you need to spend for this expense, this is the amount you are planning to budget. When it comes to bills, you would write here the bill exact amount.
- finally, when you have paid that expense you would then write down under the “Spent” column how much you actually spent for this. When it comes to expenses that are non-one-time bills, like food, gasoline, clothes, etc. you would need to update the amount by adding the total amount of spent to that specific expense. This is another reason why the “Last updated” information is useful to give you a hint of whether you have entered the latest amount spent on it or not. For example, if I would buy today’s food for $25, I would write it down in the “Food” row under the “Spent” column. Next time I buy food, let’s say with $50, I would update the “Last updated” date value and also the amount spent for food would be $75.
- Now you calculate the total amount of the “Amount” and the “Spent” columns in the “Total” row. This is to give you an idea of how much you planned to spend and how much you actually spent. This will give you a great and essential picture of where your money was spent. If you have not done budgeting before and you are overspending your money or do not even know where they go I am sure you will be surprised by the outcome. As you can see in our example I spent $300 more than I was planning for. Next time what I know is to try for example cut my gasoline spending. This is how you would build the precious habit.
- In the end, you would calculate how much you have budget left in the “Budget left” row by simply taking your income value (in our case $5000) and deducing it from the value of the “Spent” column. This will show you how much you have money left. It is very important that you use this formula in exact order: income – spent = budget left and not spent – income, because it will give you a wrong number on how much you really have. If you get a negative value then it means that you have spent more money than your income. This can happen because you have saved money in your account and your income for this month was not enough. Don’t worry about it. If your value shows positive, then it means you have this much money from this month :). You can save it, invest it or use it in another way. I highly recommend putting that money either into savings or if you know how to invest perhaps using it for your investment.
- If you are overspending based on the budgeting you made then think about what unnecessary expenses you can cut from and if there are perhaps some expenses that you can rid of totally.
Budget templates
As a gift, I have created two kinds of templates for you. One is in CSV format and the other is in PDF format. If you are using Excel then CSV is a great choice and if you are more a person who likes doing things on paper, you can print the PDF version of the budget template and start filling it.
Conclusion
As you can see budgeting is not difficult to do and it will help you take control of your personal finance. It will also show you where your money is going and how much you spend. With this in your hand, you are able to cut or even get rid of some unnecessary expenses that can help build your wealth. On top of that you are able to build a habit on how to not overspend your money or not spend on something unnecessary.
With the money that is left, you are able to invest or save or do whatever you like. I highly recommend of start saving first for your emergency fund which should cover 6 months of your expenses and only then start building your wealth and paying debts off if you have any.
Did you like this post or did you find it useful? I would love to hear your comment, feel free to write your comment below or you can always contact me via the Contact page.
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