Most of us are busy and don’t have time to think about budgeting.
It’s one more thing on the to-do list.
I am sure you are busy with work, family, friends, and other stuff.
So what is the busy person to do when it comes to budgeting?
I was asked by a reader to break down how to put together a super simple budget.
Don’t Focus on the details
If you are not a numbers’ person, budgeting may overwhelm you. It may seem like a complicated process and a steep learning curve. If you feel this way, I want to make it extremely easy for you.
I want to stress that you don’t need to focus on the details in order to develop an effective budget. Instead, I want you to focus on the big picture.
A comprehensive, line by line budget can answer hundreds of questions about your money; but it is not necessary. By focusing on the necessary, you can save time, effort and your sanity. All you need is three questions.
Here are the three questions your budget should answer
Budgeting does not have to complicated. Don't think of it as a mathematical model, think of it as an interview... with yourself. In other words, to make budgeting easy, frame the budgeting process as a Q&A session.
Every good budget can answer these three easy questions:
- How much do you earn?
- How much do you spend?
- How much is left over?
If you can answer those three questions, you will be able to make a simple budget.
A monthly budget is a good starting point
Before we start, we have to identify what period of time we are looking at for our budget. We have a couple of options here. A day is way too short. A week is not as short, but it is still short. A month is much better. A quarter (3 months) is ok. And a year is way too long (if you are a beginner budgeter). I find that a month is long enough, but not too long.
When budgeting, you need the period of time to be long enough to see a trend, but short enough to do something about it. We budget because we want to be proactive in our finances; not to be spectators. Thus, at the end of a month's time, we can assess and pivot if we need to, without too much financial damage being done.
Figure out how much you bring home each month
Do you know how much you earn in a year? I am sure you do. How about your income after taxes? Probably not.
The easiest way to find this out is to look at your bank account and see how much cash came in last month, also known as account credits. What was credited to your checking account?
If you are ambitious, you could take the total inflow of cash from the past year and divide it by 12 to get a more accurate picture of your monthly income.
Determine your total monthly spending
This is the fun (or not so fun) part of determining how much you spend each month.
Take the same approach as you did with your income. Look at the total outflow of cash from your account. This is what accountants call debits.
Are you in deficit, surplus or breaking even?
After the first two steps you should be able to answer the following question:
Your Income - Your Spending = ?
There are only 3 answers to this question.
1.) Your Income - Your Spending = Surplus
This happens when: Your Income more than Your Spending
Example: $2000 in Income > $1500 in Spending
2.) Your Income - Your Spending = Deficit
This happens when: Your Income is less than Your Spending
Example: $1500 in Income < $2000 in Spending
3.) Your Income - Your Spending = Breakeven
This happens when: Your Income is equal to Your Spending
Example: $2000 in Income = $2000 in Spending
Scenario 1 is the best option. Scenario 3 is acceptable. Scenario 2, however, should be avoided as soon as possible.
Where do you go from here?
You got two options:
- Earn more than you spend
- Spend less than you earn
It really is that simple.