How do you make a good budget? Whether you’re building a better budget or making a gourmet meal, what do you start with? Better ingredients. If your building blocks aren’t right, how can your budget be right? You wouldn’t make a third-date-dinner with stale ingredients, would you? Why do you keep making “budgets” without of date ideas and tools?
What’s wrong with the usual budgeting advice? Let’s take a look:
A typical definition of a budget is “an itemized estimate of your income and expenses for a given period of time.” Simple, right? Unless, of course, you’ve got a variable income or a penchant for over-optimism when it comes to your bootstrapping ability. Oh, right. Hmm.
Especially if you’re self-employed, a freelancer, or a side-hustler, you’re probably thinking right now about how you’re totally going to close that sales call later this week, and of course, you’re going to get a ton of new leads from that guest spot you’re doing. Well - maybe you will! But maybe you won’t. Or, you will, but it’ll all take a little longer than you thought. All of that will throw off your plans if you use a typical budget.
So around here, I love budgets but what I mean when I say “budget” has a slightly different definition. Specifically, I’m all about a reality-based, zero-sum budget. Here’s what goes in one:
Lynne’s Best Ever Recipe for a Great Budget
The money you have today.
Do not make a budget with money you do not have. That’s called forecasting and it’s not for you. That has it's own value, but it should be totally separate from the spending plan we're talking about here.
This is important. Do not ignore this part.
All your monthly bills
All your annual and semi-annual bills, such as:
Credit card annual fees
Your irregular expenses that aren’t bills, like:
The holidays - they’re coming!
- Something for the unexpected and unpredictable. You can’t know when or how much a car repair will be, but you know it’ll happen eventually. Put some money aside for this.
Your dreams and goals
Boring goals (pay off your credit card, retirement, get an emergency fund)
Fun goals (big vacation! Quit your day job!)
Your spending history to match reality to your plans
Your spending future. Let’s plan for what’s coming up as well as what already happened
Wiggle room. Sh*t happens.
Fun! Regular fun (like your Netflix habit or your monthly drinks with pals) as well as unrestricted money to blow on things like massages and spontaneous, unbudgeted trips to visit your bff.
Steps to make a great budget:
Mix the above in the tool of your choice. I recommend You Need a Budget (YNAB) but any tool that includes the above will work. Spreadsheets, lots of bank accounts with different purposes, or even cash and envelopes can work. But...those are a lot more work than a tool designed for this purpose. Up to you. I’m all about ease so you actually stick to it. You do you.
Knead your budget regularly until it is soft and pliable. You should be interacting with your budget a lot. Every few days (at most! Daily is preferable) you should be updating your transactions (reality) and adjusting your budget as needed to handle life-changing. Whenever you get paid again, it’s time to plan for that money. New money = new budget. When life changes, change the budget. Keep it flexible.
Bake at medium temp until green. OK, green isn’t as appealing in this cooking-metaphor as ‘crispy and brown around the edges’ but stay with me - doesn’t stacks of green cash sound pretty appetizing? The point here is to keep the money in your budget for a while. Over time, your bank account will grow fat and happy, and you will sleep better and smile more. You’ll start telling people all about how great budgeting it is. But when you first start out, you’re still a little raw in the middle. Give it some time.
You’ll know your budget is a good budget when it feels like it’s simply a tool that you use to leverage your money better. Your budget is a way to reflect back to yourself decisions you’ve made about how you’ll handle the finite amount of money you have. That’s all it is. Its purpose is to remind you of your plan and to help hold you accountable to the plan. Done well, it also helps organize information for you so that you don’t have to do mental math and hold everything in your head. It’s just there to give you the right information, at the right time, so you can make better decisions.
Tell me in the comments - do you have a budget? Is it made of high quality ingredients? Is it treating you well? What do you wish was different about it?
My favorite budgeting tool, and the only one I recommend is You Need a Budget (YNAB). Use this link to try it out for free for 34 days, and if you sign up using my link, you’ll get an extra month free after you subscribe. That’s a referral link, meaning I’ll also get an extra month free - but I recommended it for a decade before they introduced a referral program, so take whatever path you’d like, but get thee to YNAB.
Next week I’ll be going over how to know if YNAB is the right tool for you. Check back then, or join my newsletter below to be the first to hear about it.