How To- Create a Budget

Anything you can track you can improve.

The same is true of your finances. Creating a budget is very simple:

1. Download your last 3-12 months of activity from your bank and any credit cards you use. 12 months is best due to seasonal variances in many expenses, but you may not be able to go back that far. Get what you can.

2. Make sure all data is within the same period. This will have to match whichever download has the shortest time period. For example, if your checking account goes back 6 months, you have one credit card that goes back 12 months, and another credit card that goes back 9 months, you will want to use the last 6 months for everything.

3. Cut the data from each spreadsheets and paste it so that all data is in one spreadsheet. You will most likely have to move the columns from each individual spreadsheet so the date is in Column A, the vendor is in Column B, and the amounts in Columns C and D. Column C will be for money spent and Column D will be for money refunded. You can discard any other information. Make sure you save your spreadsheet.

4. Sort the spreadsheet by vendor.

5. Look at each line item. In Column E enter which category this purchase fell into. Was it gas? food? gift? utilities? fun? insurance? travel? You get the idea. Save your spreadsheet.

5. Sort by Column E. Sum each category. Make sure you deduct anything that was returned. Place the total for each category in Column F.

6. Copy and Paste the entire spreadsheet into a new workbook. When you paste choose “Paste Special- Values” so Column F is now just numbers and not formulas.

7. Sort by Column F. Delete any rows that do not have an amount in Column F. Save your spreadsheet.

8. Now you have a good idea of where your money is going and you are ready to create a budget.

9. Delete Columns A through D. You will now see the category in Column A and the amount in Column B.

10. In Column C create a formula that annualizes your amounts in Column B. If your initial data was for six months you will multiply Coumn B by 2. If it was three months, you will multiply by 4. Save your spreadsheet.

11. Look at your annual amounts. If you know something is not correct, change it. This is most likely to be in categories that have seasonal variations and you are not working with 12 months worth of data.

12. Now that you have your annual expenses, you want to see how much it costs monthly or per paycheck. To see how much you should allocate per month, in Column D divide Column C by 12. If you are paid bi-weekly, to see how much you should allocate per pay period, in Column D divide Column C by 26. If you are paid semi-monthly (twice per month), in Column D divide Column C by 24. If you are paid weekly, in Column D divide Column C by 52. Save your spreadsheet.

13. Group your categories so all the living expenses are together, all the gift/giving items are together, and so on. Chances are you will not have any savings or investment categories, but if you do, group them together. Now you can easily see what your spending buckets are. Sum each bucket and enter the amount in Column E.

13. Take a look at your after-tax paycheck. Add back in the amount contributed to your 401(K). Add any other revenue sources you have- child/spousal support, pensions, annuities, etc. If your other revenue sources are paid at different intervals than your paycheck, use the same formulas you used in #12 to find out how much you receive per pay period.

14. Add a row for your “Invest in Your Future”. Enter your 401(K) contribution into Column E of this row.

15. Column F, divide each bucket by the amount you calculated in #13. This will you show the percentage you are spending in each bucket.

16. How do your current allocations compare to the allocations recommended by millionaires and billionaires? These allocations are listed in the blog titled “How To- Allocate Your Income”.

17. See where you can make realistic, long-term adjustments to your spending patterns to get your budget into alignment with the recommendations. If your living expenses are greater than 55% of your income, maybe there are things currently in living expenses that could be assigned to a different bucket. Do you have to have a coffee every morning? That could be assigned to your “Play” bucket instead of “Living Expenses”. The same could be applied to your Netflix or Amazon Prime account. Anything that brings you joy and happiness can go into the “Play” bucket.

18. Set up your savings, future you, and any other long-term buckets (ie: for a dream vacation, wedding, new car, baby, etc) so the money goes directly from your paycheck to those accounts. If you are not currently contributing 10% of your after-tax income to your 401(K), set it up so the remaining funds go directly to their own account so you can purchase investments on your own. If you like to see your progress, and are disciplined enough not to “borrow” from them, you can take these amount from your bank in cash and add them to your envelope or jar system. Deposit a portion of these funds into the appropriate bank account so your envelope or jar does not overflow.

19. Update your budget annually, or more often if you cannot get that much data from your financial institutions. You already have the data for the period you based your current budget on. Add to it to get a better idea of your annual spending patterns.

20. Use any increases in revenue as an opportunity to balance your allocations and update your budget accordingly.

CONGRATULATIONS! You are now empowered to take control of your finances instead of just wondering where all your money goes.