Budgeting 101: Mastering Monthly Budgeting

Discover the art of budgeting and how it empowers you to follow Warren Buffett’s timeless advice: “Do not save what is left after spending; instead, spend what is left after saving.” This blog post provides a transparent overview of my personal budgeting approach, offering insights and tips for managing your monthly finances effectively.

Essential Components of a Successful Budget

In order to put together a budget you need the following:

1. Income – Track all of your monthly income including the salary from your job and any other sources of income.
2. Expenses – Keep track on how much you spend per month and on what. Categorize your expenses in buckets such as rent, utilities, food, transportation, child care, entertainment, shopping, and travel. Categories should be as specific as possible because the goal is to see which categories have the highest expenses.
3. Subtract income less expenses to calculate your savings –
   • If the result is negative, it indicates that you are spending more than you earn, leading to a decrease in your net worth. In such cases, assess your expense categories to identify areas where you can reduce costs.
   • Conversely, if your savings are positive, you are spending less than you earn, which increases your net worth. You can begin by moving your money into a high yield savings account and building an emergency fund. Once this is established you can begin investing your savings. Don’t worry if you don’t know where to start, we will get there.

My personal budget

Keeping track of all of your expenses might seem like a tedious task but if you pay with credit or debit cards they become easy to track. Personally, I keep track of all my accounts in Mint.com and Personal Capital. I link all of my debit cards, credit cards, savings accounts and investment accounts to these websites. These accounts track all of my expenses in one place and calculate my net worth at any point in time.

To build my budget I download all of my monthly transactions from mint.com and classify them between income and expenses. I then take my expenses and classify them further into the categories seen in my 2019 personal expense pie chart. These categories are based on my personal lifestyle, you might find yourself in another stage of life so you’d adjust them as necessary.

The pie chart above shows my actual spending categories for 2019

My budgeting insights

Like many people my rent represents my largest expense but my second and third expenses are more personal. I enjoy traveling and so that explains my second largest expense. In order to continue to travel and meet my savings goals I make conscious decisions to cut back in other categories. For example I cut back on categories which personally aren’t as fulfilling like shopping.

My third largest category includes gifts. Like many times first generation college graduates I want to give back to my parents, because I know I wouldn’t be where I am today without their sacrifices so I do it in the form of gifts. To me this is a necessary expense; however, it is important that I understand how this affects me financially so I track it separately. I know that I am financially stable and I can control expenses elsewhere to continue to give to my parents without cutting into my planned savings.

By making these conscious decisions I manage to spend on what I consider a priority; while maintaining a 70% savings rate.

My personal savings method

Once I classify all my expenses I then calculate my monthly savings by subtracting my total expenses from my total income. After budgeting for a few months I determined my monthly spending range and this helped me establish my personal savings method.

When I get paid on the 1st of the month I only keep the amount of my monthly spending in my checking account and transfer the remaining amount to my HYSA and investments. Then when I get paid on the 15th I move everything directly to my savings/investments. This way I save my money before I spend for the month. If for any reason I go over my set amount I then go into my savings; however, this keeps me mindful of my expenses throughout the month. If I have to go over my set limit I ask myself if I have been overspending and if going over my set amount was necessary.

Most people begin by spending and not saving so at the end of the month they save what is remaining but this likely leads to very little or no savings. If you establish your spending before the beginning of the month then you are automatically setting your savings. It is essential that we “pay ourselves first” before paying others / buying material goods because paying ourselves first will lead to being able to invest in our future.

Online budgeting tools

Below are the online budgeting tools that I use to help me budget. Both Mint and Personal capital require you to link your bank accounts to a third party website but, from my 5+ years’ experience of using them, they are secure:

• Mint – Using Mint you can link all of your bank accounts and investment accounts, view your monthly credit score and follow your net worth trends. Another good feature is the ability to create a budget by creating specific spending categories and setting a monthly amount. Mint then takes all of your transactions and classifies them into these categories so you have to review them to make sure they are accurately classified.

• Personal Capital – Using personal capital you link all of your bank accounts and investment accounts and it will track your net worth. One of my favorite things about Personal capital are the investing features which allow you to get an overview of your portfolio allocation and sectors you are investing in. This allows you to make sure that you are properly diversified. Use this referral link to sign up and start budgeting today.
• Our budgeting templates – There are many different budgeting methods including a spreadsheet budget, 50/20/30 budget and a zero based budget. We created these different templates to help you get started. All you have to do is sign up to our newsletter!