Budgeting Basics (Part 3): Setting Up Your Budget and Reverse Engineering Your Goals

Budgeting Basics (Part 3): Setting Up Your Budget and Reverse Engineering Your Goals

Welcome back to the budgeting basics series. Today we are going to get your budget set up.We will set goals by starting at the end and reverse engineering them to make them attainable. So far, you have put together a priorities list to help guide where your money should go and you have tracked your income and expenses so you can see where your money has been going. Now we can start putting the two together in your actual budget.

Start With Your Actual Spending

They say it takes 21 days to form a habit. That’s 21 days of repeating an action without going back to your old way of doing things. I think the magic number for budgeting is more like three months. Though you may be fired up to slash your budget and save tons of money toward your goals, you will quickly find that you overspend in a few categories, or spend too much in the Misc. category. This can be a big de-motivator when you are trying to change your spending habits. It will feel like you failed and can easily lead into giving up on your budget.

I recommend that when you put together your new budget, stick with the amounts you’ve been spending during the last few months (unless it’s extremely excessive). I would make cuts in certain categories that you would like to save money in, but DO NOT GET DISCOURAGED when you overspend. It will happen. You will overspend on eating out or entertainment, unexpected expenses will arise and blow up your Misc. category. This is perfectly normal. Your goal is to keep putting your monthly budget on paper (or excel) every month before the month begins, discuss how you want to spend your money and then talk about how you are going to stick to the plan.

Example Budget

Here’s an example of a starting budget that uses the categories you came up with when tracking your expenses for the last two months:

Original Budget                                                            Modified Budget

Income 3500 Income 3500
Donations Donations
Church   Tithe 300 Church   Tithe 300
Other Other
Bills Bills
Mortgage 1200 Mortgage 1200
Electric   (PUD) 75 Electric   (PUD) 75
Natural   Gas (PSE) 100 Natural   Gas (PSE) 100
Water/Sewer 75 Water/Sewer 75
Trash 30 Trash 30
Cell   Phone 90 Cell   Phone 90
Cable 30 Cable 30
Internet 30 Internet 30
Student   Loan 1 200 Student   Loan 1 200
Student   Loan 2 100 Student   Loan 2 100
Credit   Card 1 80 Credit   Card 1 80
Credit   Card 2 100 Credit   Card 2 100
Car   Payments 250 Car   Payments 0
Car   Insurance 120 Car   Insurance 120
Medical Medical
Necessities Necessities
Food 400 Food 350
Gas 150 Gas 150
Child   Care Child   Care
Date 50 Date 50
Spending   Cash 40 Spending   Cash 40
Pets 30 Pets 30
Other Other
Entertainment 50 Entertainment 0
Restaurants 50 Restaurants 60
Home   Repair 20 Home   Repair 20
Car   Repair 20 Car   Repair 20
Gifts 20 Gifts 0
Misc Misc
Total Expenses 3610 Total Expenses 3250
Money Leftover -110 Money Leftover 250

 

Spend Less Than You Make

As you can see, this person is spending more money than they currently are making in net income.  There are MANY people who fall into this category, so don’t feel bad if you find yourself here when you get everything down on paper. You will need to make some adjustments to get you to the place where you spend less than you make, so start looking at your spending categories and see where you can start cutting out some expenses.

The most common areas where people overspend money is in the food and restaurants categories. One of the toughest areas to cut is the car payment category. I would strongly suggest that if you are negative on your monthly budget and have a car payment that you seriously start looking into selling your car and looking for a reliable inexpensive replacement vehicle that you can either buy with cash, or pull out a small loan to purchase. If you can make some sacrifices now, you will set yourself up on a path that will allow you to build real wealth and achieve financial peace instead of always being short on cash and digging yourself deeper and deeper into debt.

As you can see in the Modified Budget above, I cut out the car payment, combined the entertainment category with the restaurants category to reduce it by $40 and cut down the food budget by $50. These three adjustments caused it to go from being negative every month to saving $250 a month. That’s a $4320 savings per year compared to the old budget!!

Set Goals and Reverse Engineer Them

Once you have your budget set up in a way that makes it so you are spending less than you make per month, you can start to think about setting goals. The best way to set a goal is to start at the end and work backwards to ensure you will reach that goal. One of our readers said that they have a goal of getting a truck. Let’s use that as an example:

Let’s say they want a good used truck (as I ALWAYS suggest buying good used vehicles). They do some searching on Craigslist and find a few trucks that fit their needs that are around $5,000. Now they have the number they need to reach if they want to buy this truck. Let’s say they would like to get this new truck by next summer, or 15 months from now. So they need to save $5,000 in the next 15 months to go out and purchase their truck. If you do the math, they would need to save $334 a month for the next 15 months to have the funds needed to buy this truck. SIMPLE! And since this truck is a priority over video games and random stuff from Wal-Mart, they just cut out those areas of spending until they have freed up $334 a month that they can put in a savings account until they have enough to buy the truck.

IT’S THAT EASY!

If you follow the above steps for setting financial goals, you will always achieve them. Even if you hit a few bumps in the road,  the worst that can happen is your goal is delayed or re-prioritized. I suggest that once you have put everything on paper and you have a realistic snapshot of where your money will go, sit down and go over some financial goals that you would like to achieve in the next year. This is the fun part of budgeting! You get to budget in the things that you are excited about and set goals that you will succeed in achieving.

Budget Means Freedom

When I say “budget” out loud in a social setting, I can see people physically have an averse reaction to the word. I might as well have said “and no happiness, fun, or freedom, and you have to give up everything you love.” This connotation permeates our culture these days and has caused budgeting to be associated with being a killjoy. I’m here to declare that budget = freedom! From the very first month my wife and I were spending on a budget, we have had more fun and spent more time doing the things we love than we ever did without a budget. And all of that did not come with a side of guilt. We had prioritized our spending and enjoyed every dollar we spent (except of those pesky student loans!). I encourage everyone to live on a budget for three months the way I have described and see if you don’t feel 10x better afterwards. Trust me, I’m a professional (not true).

In Part 4, we’ll talk about Why You Should Get a Month Ahead. This has been the BIGGEST financial stress reliever in our marriage.

Comments: How has living on a budget helped you enjoy spending money on the things you love? If you don’t have a budget, why not? Also, why haven’t you liked me on Facebook yet? :)

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Comments

  1. Excellent tips. These are something that I know a lot of people stumble on (or I hope so because otherwise it was just me!). I made our first budget to rigid and with no fun money. I would also go over budget and than spend wildly because it didn’t matter as I’d already gone over budget. I’ve gotten much, much better though!

    • There is definitely a psychological component to budgeting. Dave Ramsey likes to say finances are 20% math and 80% behavioral. I would tend to agree, as I have found that my attitude toward budgeting makes a HUGE DIFFERENCE in how well I stick to it. That’s why I want to squash the negative connotation that the word “BUGDET” carries. I want budgeting to be associated with doing the things you love, and not wasting money on the things you don’t. Congrats on loosening up the budget. You definitely need to budget in fun money, or like you said, you’ll blow the budget and spend wildly because it’s too restrictive. Thanks for dropping by :)

  2. Hannah says:

    I agree that a budget is freeing rather than restricting. It’s so nice to know that we can go spend money on dinner and a movie every now and then and not worry about spending the money because it’s already been spent on paper!

  3. I love budgets, I just struggle to live within them! But knowing how much money you have and how much you’re spending is the first key to taking control of your finances.

    • I love budgets too! Sometimes they are like wild animals and you need to rope ‘em in with a lasso to keep them under control. It’s a little bit of work, but it’s so much better than letting them run wild and tear up your lawn! :)

Trackbacks

  1. [...] Heart Budgets gives some good tips to those starting up a budget (and a reminder for those with a [...]

  2. [...] set aside for each of these categories. In Part 3 of the Budgeting Basics series, we talked about setting goals and how to reach them every time. You come up with an amount that you would like to save by a certain date and reverse engineer it [...]

  3. [...] This is something I talk about all the time. What I should have done is set up a goal and reverse engineered my budget for this project. I did pretty well for the fence, pergolo and patio portion of this project, but I [...]

  4. [...] both on the same page, don’t they? I would say continue to have conversations about your goals and make sure you don’t lose sight of why he’s working in the first [...]

  5. […] In Part 3, we’ll get down to the nuts and bolts of Setting Up Your Budget and Reverse Engineering Your Goals. […]

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  7. […] It stems from having priorities and goals in your life. If you don’t have those, you can’t even possibly know what to do with […]

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