7 Steps on How to Create a Budget

Summary

This video script outlines a comprehensive guide to creating a budget through seven steps, emphasizing the importance of tracking income and expenses, setting a baseline, categorizing finances, and comparing income to expenses. It introduces the 50-20-30 rule for budget allocation, suggesting 50% for essentials, 20% for savings and debt, and 30% for lifestyle choices, ultimately aiming to transform budgeting into a tool for financial freedom and planning for unexpected costs.

Takeaways

• 📝 **Track Your Income and Expenses**: Start by journaling all income and expenses to understand your financial flow.
• 💲 **Set Your Income Baseline**: Calculate your total income from various sources to establish a baseline for budgeting.
• 📅 **Determine Your Expenses**: Identify both fixed and variable expenses by reviewing past statements and planning for the future.
• 📁 **Categorize Your Income and Expenses**: Organize your finances into categories for detailed budget management.
• 💵 **Compare Your Income to Your Expenses**: Aim to have more income than expenses to ensure financial stability.
• 💳 **Make Plans for Unplanned Expenses**: Build a rainy-day fund to cover unexpected costs and avoid debt.
• 💹 **Turn Your Budget Into a Document of Freedom**: Use a budget to maintain financial freedom and enjoy life within your means.
• 💰 **50-20-30 Rule**: Allocate 50% of your income to essentials, 20% to savings and debt repayment, and 30% to lifestyle choices.
• 💵 **Income Categories**: At minimum, categorize income into employment, family contributions, and student loans.
• 📈 **Expense Categories**: Essential categories include housing, food, transportation, education, and non-essential expenses.
• 💲 **Budgeting as a Routine**: Make budgeting a regular practice to manage money effectively and achieve financial goals.

Q & A

What is the first step in creating a budget according to the video?

The first step in creating a budget is to track your income and expenses using a money journal.

What is a money journal and how is it used in budgeting?

A money journal is a tool, such as a notebook, spreadsheet, or app, used to record all income as 'income' and all spending as 'expenses' to track financial activity.

How do you determine your income baseline?

You determine your income baseline by identifying all sources of income, such as employment, savings, family contributions, scholarships, grants, and gifts, then adding them up.

Why should student loans be used sparingly in budgeting?

Student loans should be used sparingly because they are a form of debt and should only be used for essential education-related expenses.

What are the three ways to determine your monthly and annual expenses?

You can determine your expenses by looking back at your past spending, budgeting for fixed expenses, and using your money journal to track ongoing spending.

What are fixed expenses and can you give some examples?

Fixed expenses are regular, predictable costs that do not change, such as a 12-month lease payment, internet dues, car payments, and childcare.

How should you categorize your income and expenses in a budget?

You can categorize your income and expenses based on how detailed you want your budget to be. At minimum, categorize income into Employment, Family Contribution, and Student Loans, and expenses into Housing, Food, Transportation, Education, and Non-Essential expenses.

Why is it important to compare your income to your expenses?

Comparing income to expenses helps you understand if you are living within your means and allows you to identify areas where you may need to cut back to avoid overspending.

What is the purpose of a rainy-day fund in a budget?

A rainy-day fund is an emergency savings account for unexpected expenses to avoid relying on credit cards or other high-cost borrowing.

How does the 50-20-30 rule apply to budgeting?

The 50-20-30 rule suggests allocating 50% of your income to essential expenses, 20% to savings and debt repayment, and 30% to lifestyle choices and discretionary spending.

Why is it important to turn your budget into a document of freedom rather than a restriction?

Turning your budget into a document of freedom allows you to enjoy life responsibly by planning for both necessities and the things that bring you happiness within your means.

Outlines

00:00

💼 Budgeting Basics

This paragraph introduces the importance of budgeting regardless of income level and offers a step-by-step guide to creating a budget. It emphasizes tracking income and expenses using a money journal, setting an income baseline by adding up all sources of income, and determining expenses by reviewing past spending, considering fixed expenses, and noting variable expenses through ongoing tracking.

📊 Categorizing Finances

The second paragraph discusses categorizing income and expenses, suggesting a minimum of three categories for income (Employment, Family Contribution, Student Loans) and five for expenses (Housing, Food, Transportation, Education, Non-Essential). It encourages detail-oriented budgeting to manage finances effectively and understand spending patterns.

💸 Income vs. Expenses

This section advises comparing income to expenses to ensure a sustainable budget, with the goal of having more income than expenses. It suggests strategies for reducing expenses if necessary to achieve this balance.

🌧️ Emergency Fund Planning

The fourth paragraph highlights the necessity of an emergency fund for unexpected expenses, such as car repairs. It stresses that without savings, one might resort to credit cards, leading to costly debt if not promptly repaid.

🏖️ Budgeting for Joy

The final paragraph challenges the misconception that budgets restrict enjoyment of life. It encourages incorporating small indulgences into the budget to maintain happiness and financial health, suggesting a balance between saving and spending.

🔢 The 50-20-30 Rule

The script concludes with the 50-20-30 rule for budgeting: allocate 50% of income to essential expenses, 20% to savings and debt repayment, and 30% to lifestyle choices. This rule aims to provide a balanced approach to managing finances.

Keywords

💡Budgeting

Budgeting refers to the process of planning and controlling one's finances. In the context of the video, it is the primary method for managing money effectively. The script emphasizes that budgeting is essential regardless of income level and provides a step-by-step guide on how to create a budget, which is central to the video's theme of financial management.

💡Money Journal

A money journal is a tool for tracking financial transactions, which can be a physical notebook, a spreadsheet, or a digital application. The video script suggests using a money journal as a method for recording income and expenses, which is a foundational step in the budgeting process described.

💡Income Baseline

The income baseline represents the total amount of money one earns, which includes employment income, family contributions, scholarships, grants, and gifts. The video script uses the concept to establish a starting point for budgeting by calculating the sum of all income sources.

💡Expenses

Expenses are the costs incurred in daily life, categorized into fixed and variable. The video script outlines methods for determining expenses, such as reviewing past statements and anticipating future costs, which is crucial for creating an accurate budget.

💡Categorization

Categorization in budgeting involves sorting income and expenses into specific groups. The video script suggests categorizing expenses like housing, food, and transportation, and income like employment and student loans, to manage finances more effectively.

💡50-20-30 Rule

The 50-20-30 rule is a budgeting guideline where 50% of income covers essential expenses, 20% goes to savings and debt repayment, and 30% is for discretionary spending. The video script introduces this rule as a framework for allocating income, emphasizing a balanced approach to financial planning.

💡Essential Expenses

Essential expenses are the necessary costs for basic living needs, such as housing, transportation, and groceries. The video script highlights these as the primary category of spending, where the majority of one's income should be allocated according to the 50-20-30 rule.

💡Savings

Savings refer to the money set aside for future needs or emergencies. The video script encourages allocating a portion of income (20% according to the 50-20-30 rule) for savings, emphasizing the importance of financial security.

💡Rainy-Day Fund

A rainy-day fund is an emergency savings account for unexpected expenses. The video script advises building this fund to avoid relying on credit cards for unforeseen costs, which can lead to debt if not managed properly.

💡Lifestyle Choices

Lifestyle choices are personal spending decisions that reflect one's preferences and values. The video script allocates 30% of income for these choices, such as entertainment and dining out, suggesting that budgeting can accommodate personal happiness within financial constraints.

💡Document of Freedom

The term 'Document of Freedom' is used in the video script to describe how a budget can liberate rather than restrict financial choices. It implies that with a budget, one can enjoy life's pleasures without financial stress, as long as they fit within the budgeted plan.

Highlights

The importance of budgeting to manage money effectively.

Introduction to the 7 steps to creating a budget.

The 50-20-30 Rule for budgeting.

Step 1 - Tracking income and expenses using a money journal.

Step 2 - Setting an income baseline by adding up all income sources.

Step 3 - Determining expenses through past spending, fixed expenses, and variable expenses.

Step 4 - Categorizing income and expenses for detailed budget management.

Step 5 - Comparing income to expenses to strive for more income than expenses.

Step 6 - Planning for unplanned expenses with a cushion or emergency fund.

Step 7 - Transforming the budget into a document of financial freedom.

The misconception that budgets limit spending and enjoyment of life.

How to make budgeting a part of your routine.

The types of income to include in your budget baseline.

Why student loans should be used sparingly in a budget.

The difference between fixed and variable expenses.

The use of a money journal to analyze spending over time.

The minimum categories suggested for income and expenses.

The significance of having more income than expenses for a sustainable lifestyle.

The role of a rainy-day fund in handling unexpected expenses.

How to allocate your income according to the 50-20-30 rule.

Starting the process of filling in the numbers to create a budget.

Transcripts

Creating a Budget This video will discuss:

The 7 steps to creating a budget The 50-20-30 Rule

It doesn’t matter how much money you have,

one of the most important things you can do

to manage your money is to budget.

If wrapping your arms around such a mighty task seems difficult,

don’t worry. This video will provide you with step-by-step instructions

on how to budget and ideas to make the act of budgeting part of your routine.

Step 1- Track Your Income and Expenses

It’s time to do a little journaling. Not the “Dear Diary” type,

but the kind that deals with numbers.

Tracking your income and expenses is best achieved with a money journal.

A money journal can be a notebook and pen, a spreadsheet,

or any on or offline tool that works for you.

Every time you receive money, note that as income.

Every time you spend, note that as an expense. Voila! Step 1 is done.

Step 2 – Set Your Income Baseline

We need to answer the question: “how much can we afford to spend?”

Let’s find your income.

The most common form will be from employment,

but others could include money you’ve saved for college,

family contributions, scholarships, grants, or gifts.

Student loans can be considered a form of income,

but they should be used sparingly and only for essential education related expenses.

No credit product, like credit cards, can be considered a form of income.

Jot down all your income sources, add them up,

and this is your income total – also known as your baseline.

Step3 – Determine Your Expenses

Figuring out your monthly and annual expenses will be achieved in three ways.

The first way is by looking back.

Grab your last three months of checking or credit card statements

and see where you spent your money.

The second way is by looking forward.

Budget for your fixed expenses. For example, a 12-month lease

with payments of $400 a month is fixed for the next year.

Other fixed expenses could include internet dues, car payments, and child care.

Variable or unexpected expenses include things

like groceries and utility bills.

The third way to determine your expenses is achieved with your money journal.

You’ll see after a few months of tracking where your money is going.

Use that data to analyze your spending.

Step 4 – Categorize Your Income and Expenses

This step is entirely up to how detailed you want to manage your budget.

If you want to budget for groceries, you could simply create

an expense category for the food you purchase from grocery markets.

Or, if you want more detail to your budget, you could track

how much you spend on milk, meat, vegetables, desserts, and so on.

Be as detailed as you’d like.

At minimum, we suggest breaking your income into categories of

Employment, Family Contribution, and Student Loans.

And your expenses, at minimum, should include categories of

Housing, Food, Transportation, Education, and Non-Essential expenses.

However, if you have other large budget items,

be sure to make categories for those as well.

Step 5 – Compare Your Income to Your Expenses

You may have learned that you should “balance” your budget

which means your income and expenses should be equal.

In reality, you should strive to have more income than expenses.

Obviously, having more expenses than income is an unsustainable lifestyle.

Think of ways to cut your expenses.

Step 6 – Make Plans for Unplanned Expenses with a Cushion

Building your savings is vital to keeping you financially afloat.

If you have a car, you probably budget for maintenance and gas,

but you might not budget for a surprise expenses like a new alternator.

That is where your rainy-day fund comes in and saves the day.

Your rainy-day fund is an emergency fund for unexpected expenses.

Without these savings, you may have to use a credit card

and that could turn into a more costly expense if you cannot pay it off right away.

Step 7 – Turn Your Budget Into a Document of Freedom

Many people mistakenly think their budget is going to limit

their ability to spend and enjoy life. Not so!

If you know that buying a new clothing item, seeing the newest movies,

or getting a $5 specialty coffee really makes you happy, then make them

guilt-free special occasions that fit within your budget.

Now that we have the 7 steps defined,

consider following the 50-20-30 rule when budgeting.

50% of your income goes to essential expenses like housing,

transportation, and groceries. 20% of your income

is focused on building your savings and paying off high-interest debt.

30% is for lifestyle choices; things like cell phone,

entertainment, and going out to eat.

Now, you’ve got the outline of a budget. Start filling in the numbers

and you’ll be on your way to creating a budget.