by Rob Bertman, CFA®, CFP®in Budgeting
May 19, 2022
Sticking to a budget is tough!
We feel like we need to stop spending money on the things we care about then follow a rigid and restrictive budget in order for it to work.
But that is flat out WRONG!
Creating a budget is not all about cutting costs across the board and seeing how much money you can save.
Making a budget is all about giving you room to spend money on the things you enjoy while also getting rid of the stuff you don’t care about.
But the first step to budgeting effectively is asking the right questions.
How you answer these budgeting questions will guide you toward a budget that is sustainable while helping you reach your short term and long term goals.
We’ll take you through questions to ask before budgeting, when you’re reviewing it after the fact, and some budgeting FAQs.
Let’s talk through your specific budgeting questions together!
Table of Contents
Questions to ask before you start a budget
How great would it be if you knew that your money was:
- Spent on things that matter to you
- Going toward the best places to eliminate your money stressors and reach your financial goals?
Then, what if you had a budget that actually stuck each month.
It can happen!
The goal of a budget is to make every single dollar count.
You can determine what that means for you answering these key budgeting questions.
What are your values and priorities as an individual, couple & family?
Any money you spend on things that don’t matter to you is money wasted.
So let’s figure out what matters to you.
What are the things that help you become the best version of yourself, refresh & recharge, and that are just plain fun?
What are your values and priorities?
Identify these things in 3 areas, you as an individual, you as a couple, and you as a family.
When you reflect on these, they will inform areas of spending that you should preserve to live your best life.
We definitely want to make room for this in our budget.
What are your biggest financial stressors right now?
Money should flow to the things you care about.
But it should also flow to areas that will help relieve stress about your situation.
What part of your financial life is really occupying a lot of your emotional energy?
Do you have debt you want to take care of or are behind on bills? Feel like you want more cash in the bank?
You’ll want to budget money to get rid of it.
How much have we actually been spending over the last 3-6 months?
Here’s what trips many people up when budgeting:
They pull numbers out of the air and think they’ll just make it happen. That’s setting up a budget that is doomed to fail.
Past spending is a reflection of habits and changing them can be tough if it’s too drastic too fast.
By tracking first where you have spent money, you’ll see the levers you can pull back on that don’t fit in with the answers to the questions above and are a waste of money according to YOU.
What are the fixed expenses that would be hard to change?
The major step in finding what we need to cut is first finding what we can’t easily change.
Some expenses are just immovable unless you want to uproot your family situation.
Things like your mortgage payment or rent (and the monthly bills that go along with it) are a perfect example of that.
Unless you plan to move, that’s just going to be there.
For some, it could also be tuition for kids school or fees for their activities, car payments.
Whatever you feel would be very hard to change, add up all of those expenses.
Then you’ll see how much else you have to work with.
What are your Irregular (but expected) expenses for the month?
These are some of the biggest budget busters.
It’s the stuff that happens every year but we just seem to forget about it until we get close to it.
Things like the holidays come to mind first, but what about birthdays, anniversaries, other holidays throughout the year, summer camp dues, regular vacations.
Don’t let these things sneak up on you. These are not unexpected expenses.
Start by putting together a list of your irregular expenses and budget for them.
What are your financial goals?
Looking to get out of credit card debt, build an emergency fund, or save for retirement?
Budgeting will help you get there if you make room for it.
When you make sure all the money you spend counts, then you can maximize the amount that will flow to your balance sheet and build your net worth.
Remember that spending money is transferring your wealth to someone else.
Spend on what matters and set aside the rest to your savings goals, invest for the future, pay down your loans and become debt free..
What is your take home pay?
Your income is the amount of money we have to divide up amongst the budget categories and priorities.
Notice I said take home pay and not gross salary.
What matters is the money that actually enters your bank account.
By the way, if you run your own business or are self-employed, the income should be what you take from the company after-taxes.
I’ve seen plenty of people who don’t factor that in and just distribute their entire net income only to get a big tax bill in April.
Create a method to calculate the taxes you should be withholding. You can work with an accounting firm or tax software if you need help with this.
Bottom line is that the income you put into your personal budget is not your salary. It’s your take home pay.
How would you want to spend the leftover money?
Now that you know how much is coming in, your fixed expenses, how much to put toward your financial goals, what should you do with the extra money in your budget?
What other spending would you want to do that is aligned with your values and priorities or could help you alleviate the financial stressors?
So based upon what you know, how would you budget the rest of it?
What changes are we willing to make to make this happen?
This is where the rubber meets the road.
The perfect budget where the numbers all fit together mathematically is not necessarily a recipe for success.
Budgeting doesn’t work unless it’s realistic.
So set a budget that you have a shot at sticking too. Here’s how to do it:
Compare your budget to your prior actual spending.
Any budgeting cuts should be limited to no more than a 20-25% reduction based upon your prior spending.
For example, if you’re used to spending $1,200 per month on food, don’t try to drop down to $500. Start with lowering it to $1,000. That’s doable.
There will also be things that are really easy to change like canceling unused streaming services, getting rid of extra charges on your cell phone bill.
Progress is your friend, not perfection. So give this first go round a try and see where you end up.
Use the information as a tool to learn not to get upset with yourself.
How will we stay on track?
The budget review is critically important, but it also doesn’t have to be super complicated or take a whole bunch of time each week.
The key habit you can use to get your finances in order over the long term is tracking your spending.
Where most people get into trouble is that they feel like they have to spend a whole lot of time doing it.
I use my 5 Minute Weekly Spending Review.
This method will help you focus on the key information without spending more effort than you need to.
Looking at your spending weekly instead of monthly will also give you 4 opportunities to adjust so you end the month on target with your goals.
Simply review your transactions over the last 7 days, 1-3 key budget categories where you want to cut spending, then look at your overall net income month-to-date.
You can even set weekly spending targets for your overall spending based upon when your major expenses happen.
It’s the easiest thing to do that will have the greatest impact on budgeting.
Budget Review Questions
Now that you have successfully set up your budget, it’s now time to see how aligned your answers were with your actual spending.
Where was my budget successful?
The first time you budget, it won’t be spot on, but it will have some highlights and successes.
Review your spending at the end of the month.
Did you spend less in the areas you wanted to?
Was your overall spending down?
Focus on what good happened due to budgeting.
Where do you need to improve your budget?
You’re not going to hit every mark, but use it as motivation to improve. So what happened?
Were you too ambitious?
What came up that took you off track? Is it something that you could have anticipated?
Things won’t be perfect, so look at what went wrong as information you need to get even better next time.
What progress did you make toward your goals?
How much money did you save? How much went toward investing or retirement contributions? How much debt did you pay off?
These are all net worth building activities that will improve your finances.
Even if you spent more than you made, did you close the gap compared to last month? That’s progress!
And hay, simply budgeting is progress toward your goals! Great work!
What budgeting changes will you make?
Every new iteration of budgeting will give you information of changes you need to make.
Remember, it doesn’t always have to mean cutting back.
Sometimes you can dial up spending in a budget category that you’d like to expand. Many people have added to their dining out and travel budgets since the worst of the pandemic in the US has subsided.
It’s also an opportunity to say, “We cut it too deep here. Maybe we should increase our budget so it’s more realistic.
We don’t have to reach our ideal budget with the optimal amount going towards our net worth. Take it slow. It’s a gradual process.
Here are some of the more common questions I get when people are setting up their budget.
How many budget categories should I have?
Err on the side of having fewer. Less granularity will make it more sustainable.
Unless you’re a super spreadsheet person and you’re going to be doing a deep dive analysis on a regular basis, using the general categories is good enough.
Less is more here.
How do I budget for one-time expenses?
We have way more one-time expenses than we think we do.
So you have to ask if it’s really a one-time expense or is there something similar that could come up but not necessarily that specifically.
For example, vacations, holidays, etc aren’t really one-time, they’re actually irregular expenses.
Plus, at the end of the day, it’s money flowing out of our bank account so it has to be accounted for.
The best thing to do is to create a cushion in your budget and have an emergency fund lined up to make sure you have room when they come up.
What if my income fluctuates?
This is more common than you think.
In fact, anyone who gets a year end bonus would be considered having a fluctuating income.
It’s important to take advantage of the better income months to cushion you from the not so great months.
Each month is really unpredictable, then think about opening a separate account where your irregular income flows in (kind of like a business) and transfer out a “steady” paycheck to your regular bank account.
Creating an emergency fund is even more critical with unpredictable income too.
For more tips on managing an irregular income, you can check out another article I wrote on it right here.
Which budgeting system works best?
Some like the 50/30/20 budget (or sometimes referred to as 50 20 30 budget) where you spend 50% on fixed expenses, 30% on discretionary, and 20% toward your savings goals.
Others like the zero-based budget where you give every dollar a job.
Some like the idea of the envelope system but that is getting harder and harder to execute as cash becomes less prevalent. This is one that people say works really well but they weren’t able to sustain it over the long haul.
The fallacy with some of these models is that it assumes you can make whatever changes you want to your spending and that nothing ever comes up that you haven’t budgeted for.
I am yet to meet a person who has that flexibility and foresight.
Here’s where I’d start.
- Lay out your fixed expenses that would be a major life change to modify.
- Then your non-negotiable flexible expenses, the things that are most important to you.
- Earmark the rest to fund your savings goals.
It might seem a little bit backwards compared to the “pay yourself first” thinking, but at least it’s realistic.
Once you get a realistic budget, then you can flip it to save what you can first.
At the end of the day, the best budget is the one that WORKS and you can COMMIT to.
Create this ideal budget given where you are today. Then review your past spending habits and figure out how to get from current to ideal.
What happens if I go over budget?
Remember that every dollar spent still counts.
If you go a little over, don’t go and blow it all out of the water.
It’s kind of like having a cookie when you’re trying to eat totally clean, then saying, “Well, I ate one, so I might as well just go for it!” Then you eat a half dozen.
Give yourself some grace. It’s ok. Use it as information for the next time.
Just don’t look at yourself as a failure or give yourself permission to spend anything and everything until the budget resets.
That’s a sign that your budget is too restrictive and that you are being so hard on yourself.
Instead of being critical to yourself, pretend you’re a supportive friend, then try again with this new information.
Should I just focus on making more money instead? Isn’t that easier?
I’m all for you doing everything you can to maximize your income. And yes, it could be helpful.
But so many people I work with wonder why they are having trouble saving despite their nice income.
Lifestyle creep happens, and if we don’t focus on our spending, making more money doesn’t always lead people to save money.
Their spending tends to go up in lockstep with their pay raises.
First, start with tracking your spending and seeing what sustainable spending cuts you can make.
Then use my 50/50 Rule to save more (and spend more) as you make more.
Over time, you’ll see your savings rate climb and also enjoy having more money to spend on the things you care about.
Need help with these budgeting questions?
Spending is the #1 thing that will determine your future financial success. Plus, it is also a main source of conflict in relationships.
If you have budgeting questions or need help putting together one that will work for you over time, I’m here to help!
Schedule a free 30 minute call with me so we can talk through it.
As an expert and enthusiast, I don't have personal experiences or expertise, but I can provide information on the concepts discussed in the article you provided. Let's go through each concept mentioned in the article:
Budgeting is the process of creating a plan to manage your income and expenses. It involves tracking your income, expenses, and financial goals to ensure that you are spending your money wisely and saving for the future. Budgeting helps you make informed decisions about where your money goes and allows you to prioritize your spending based on your values and priorities.
Financial stressors are the factors that cause anxiety or worry about your financial situation. These may include debt, insufficient savings, high expenses, or any other financial challenges that impact your overall well-being. Identifying and addressing these stressors is an important step in creating a budget that aligns with your financial goals.
Fixed expenses are regular and recurring expenses that do not change significantly from month to month. Examples of fixed expenses include rent or mortgage payments, utilities, insurance premiums, and loan payments. These expenses are typically necessary and can be harder to change compared to other discretionary expenses.
Irregular expenses are expenses that occur periodically but are not part of your regular monthly budget. These expenses may include holiday gifts, vacations, car repairs, or medical bills. Planning for these expenses in your budget helps you avoid financial surprises and ensures that you have funds set aside for them when they arise.
Financial goals are the objectives you set for your long-term and short-term financial well-being. These goals can include paying off debt, saving for retirement, building an emergency fund, or saving for a specific purchase or event. Budgeting plays a crucial role in helping you allocate funds towards achieving these goals.
Take Home Pay
Take home pay refers to the amount of money you receive after taxes and other deductions have been taken out of your gross income. It represents the actual income you have available to spend and save. When creating a budget, it is important to consider your take-home pay rather than your gross salary.
Tracking expenses involves keeping a record of all the money you spend. It helps you understand where your money is going and allows you to identify areas where you can cut back or make changes. Tracking expenses can be done manually by recording each transaction or by using budgeting apps or financial software.
A budget review involves evaluating your budget after a certain period, typically on a monthly basis. During the review, you assess whether you have stayed on track with your budget, analyze your spending patterns, and make adjustments as necessary. It is an opportunity to identify areas of success, areas for improvement, and any progress made towards your financial goals.
There are various budgeting systems and approaches you can use to manage your finances. Some popular budgeting systems include the 50/30/20 budget, where you allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. Another approach is the zero-based budget, where you allocate every dollar of income to a specific category or purpose. The best budgeting system is the one that works for you and aligns with your financial goals and lifestyle.
Going Over Budget
If you go over budget in a specific category, it's important not to get discouraged. Instead, view it as an opportunity to learn and improve. Take note of the reasons for going over budget and consider whether adjustments need to be made in future budgets. It's important to be flexible and make realistic adjustments to your budget as needed.
Making More Money vs. Budgeting
While increasing your income can certainly help improve your financial situation, simply earning more money does not guarantee financial success. Without effective budgeting and spending management, increased income can lead to lifestyle inflation and increased expenses. Budgeting helps you prioritize your spending, reduce unnecessary expenses, and allocate your income towards your financial goals.
Remember, the key to successful budgeting is finding a method that works for you and aligns with your financial goals and priorities. Regularly reviewing and adjusting your budget will help you stay on track and make progress towards your financial objectives.