Building a budget for the first time may feel daunting but it can actually be an exciting experience of focusing your money in direction that brings meaning and joy to your life.  Here is a guide to setting up a budget that is easy to maintain and quickly focuses you on what is actually reasonable to spend on your day-to-day expenses while saving for the things you want and need.  Let’s get started!

First step

The first step in starting a budget may not be obvious, but it could be the most important.  The first step is to reflect on what is most important in your life, what really brings you joy and matters to you.  The reason to do this is so when choices need to be made you have a north star to keep you stable or focused.  A budget is a reflection of what you value. After some reflection, you may find you are buying things you feel you “should” have, maybe because of something a family member said to you once or some ad you saw once or any number of reasons, but on reflection they aren’t really adding value to your life.  There could be things going the other way — purchases you don’t make because you feel they are too extravagant but they could magnify the joy in your life and give you purpose.  You might want to deliberately save for those.  By cutting out the things that are not as important or based on assumptions that no longer apply to your life now, you can make room for the things that really matter to you.  So, step 1 is to take 10 – 20 minutes and reflect on what really matters to you now and write them down so that you can use that as your ballast when making choices in the next steps.

  • Take some time to reflect on what is most important to you in life
  • Write them down in a list from 1 – 5 most important to least important… Now onto the math

The Basic Budget Math

Ok, now for the basic math of setting up a workable budget.  This budget is the quickest way getting you to something workable in your life today.  Here’s the math.

Income – Recurring Expenses – Savings for Goals =  Money left over for discretionary spending

Let’s define each of these..

  • Income – Income is the amount of money you bring make.
  • Recurring Expenses – These are all the expenses that you have that are a set amount and happen on a regular basis, usually monthly.
  • Saving Goals – This is money you said aside for vacations or other goals as well as saving for emergencies.

So the first line there is income which is the amount of money you bring in and how often you are paid.  From there, find all your recurring expenses and all them all up.  (Note: Having access to your recent credit card and bank transactions can help a great deal). Recurring expenses are all the things that you currently are paying for on a regular basis that have a set amount (more on this below).  The next step is to calculate and set aside money for your savings goals.

What is leftover is the amount of money you have to put toward your daily expenses.  Then you track your daily expenses on a weekly basis to make sure you don’t overspend.

How that we have gone over the high-level let’s go over each step in detail

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The Details

So to review, the nuts and bolts of creating your first budget are …

  • Gather all your income amounts and figure out how much that is collectively a month.
  • Find all your recurring expenses.
  • Think about things you want to save for and how far in the future they are.
  • Subtract you recurring expenses and savings goals from your income.  What is left is what you can spend on discretionary needs per month.  Divide this by 4.3 to get your weekly spending limit.

Let’s go through each step

Income is the amount of money you bring

First start with your income.  Write down how much you make each paycheck and how often you receive paychecks (every month, every 2 weeks, etc…).  If you have variable income, figure out how much you make on average in each paycheck.

Figure out how much this represents per month.

So if you get paid $2,500 every two weeks, that would be $1,250 a week.  There are approximately 4.3 weeks in a month so your monthly income would be $5,375.  If you have multiple sources of income, find out their monthly equivalents and add them together.  Add them together.

Recurring Expenses

Ok, next is to gather all your recurring expenses.  These are the things you have already committed to paying, that happen on a regular basis, usually monthly.  Typical recurring expenses are also our most essential expenses – mortgage, rent, water, power, insurance – but they also include entertainment things or things that are less essential.  To help with this you can pull out your credit card statement and bank statements to 

Find all these recurring expenses and figure out how much they are per month. Most recurring expenses are monthly so this makes it easy, but if you have a recurring expense that is not monthly figure the monthly equivalent.  So if you have a quarterly say pool membership bill of $250, divide that by 3 to get the monthly amount of $83.33.

As you have gathered these recurring expenses, it can be eye-opening.  You may already see things that you are paying for that are not meaningful to you.  This is where the work done in Step 1 can start to help impact your budget.  You can start to help find things to eliminate and focus your money in a direction most meaningful to your life.

But for now add up all your recurring expenses, figure out their monthly equivalents and then add them up and write that number down.

Savings for immediate things you want or need

Ok – next is to put aside money for things you know you will need or want in the near future.  These are your saving goals.  Some common saving goals might be – 

  • Christmas fund 
  • Car Repair
  • Medical Co-pays not covered by Insurance
  • Vacation
  • Emergency Fund

For each of these you may have an amount you want to save by.   So if you want to save for vacation by June of next year, take the amount you want to save, subtract how much you have saved already and then divide that by the number of months left before the date.

So if you want to save $3,000 for vacation by June of 2025 and it’s October 2024 that means there are 9 months left before vacation.  So if you have saved $1,000 already, subtract that out and divide $2,000 by 9 months which means you have to save $222 a month.  

Do that for all your saving goals, then add up all the monthly amounts and those are the amounts you should save every month for your savings goals.

Discretionary 

Ok finally we get to what we can spend on day-to-day purchases.  Take what is left over and divide it by 4.3 to get what you can spend in a week’s time.  Track your daily spending against this amount.  These day-to-day purchases include things like clothes, groceries, entertainment.  If you want to buy clothes for example that will not leave enough money for your groceries, try to under spend in a given week and rollover your leftover weekly discretionary spending into the next week.  When you have enough discretionary money left over you can then purchase the items you want.

What to do if you are upside down?

Sometimes after your calculations, you may not have enough money left over for discretionary spending.  This is where Step 1 really comes in handy to guide you through to your next choices.   Here are some things to try if you don’t have enough money after subtracting everything.

Make extra money

If you need more money right now while you are working your way into your career, or just need more money, taking an extra job can help.  There are tons of resources for side-hustles, but today’s gig economy (Uber, Instacart, Upwork) opens the door to earning money in a way that fits with your lifestyle.  Use your extra income to pay off debt and that will reduce your recurring expenses.

Eliminate or downgrade recurring expenses

You can cut back or eliminate recurring expenses.  Refer to your list of most important things in life and then start to make hard decisions about what you want.  Can you trade in your car for a less expensive option?  Can you get rid of any subscription services you aren’t using anymore?  Can you think about getting a roommate or moving to a more affordable part of town?

Review what is most important to you in life (step 1) and start eliminating things from most important.  Make “sacrifices” for the things you really want

Be realistic about your financial goals

Revisit your savings goals and make sure they are realistic and focused on things you truly want.   If you are saving $3,000 for Christmas, can you cut back and save just $1,000. Maybe you can go on a less expensive vacation or do a stay-cation this year?

Conclusion

Some people may look at budgeting as a restrictive exercise that is full of peril but you can think of building a budget can be an exciting process of making decisions that focus your money in a way that enhances your life.  Money is supposed to work to make you happy after all.  Knowing you are setting yourself up for success can provide relief and financial peace.  

Constructing your budget with this math gets you to a budget you can start using quickly, while giving you avenues to improve your financial outlook.