Issue #028: A step by step guide to budgeting

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I just realised something STUPID

I leave a budgeting template at the bottom of every one of these emails, but I have never explained how to budget bofore…

So yeh, all I can really do is apologise and try and become a better person.

That’s why I’ve chosen to break down how to budget FROM SCRATVCH in this weeks newsletter.

Let me make something clear…

YOU DO NOT NEED TO USE MY BUDGETING TEMPLATE TO DO THIS

You can use anything you want:

• an app

• a piece of paper

• excel

• You’re own spreadsheet

The key thing is to find what works for you and run with it, because they will all more or less lead to the same outcome.

So without further ado, here’s how to budget step by step!

(quick one - if you’d rather watch a tutorial on how to budget rather than read it, just scroll down to the video)

Step 1: Analyse last month

For most people, taking a look at exactly where your money went last month will be enough. If you’re a bit crazy like me, you’ll look at the past 3 and average it out. One thing to note is if you had an ‘unusual’ month of spending, perhaps you went on holiday, then best not to use that month in this step.

What you’ll want to do is categorise all of your spending. I like to split this into three sections:

• Recurring spend/bills: Whenever the same amount leaves your account every single month (e.g. phone bill, rent, Netflix)

• General expenses: Anything that varies month to month (groceries, eating out, entertainment)

• Savings: Anything going towards future you (pension, house fund, investments)

Whilst recurring spend and savings roughly categorise themselves, you’ll want to batch general expenses into custom categories of your own, like the ones in the brackets above.

Step 2: Needs/wants/savings

Put one of these labels next to every single category that you listed out in the first step above. This should be fairly obvious for every transaction, but if it’s not clear, it’s probably a want:

Need: something that you require each month (rent, groceries, transport)

Want: something that’s a nice to have (eating out, shopping, gym)

Savings: something towards future you (pension, house fund, investments)

Step 3: Find the cuts

Before you start to budget for next month, you’ll want to find some quick wins where you can save some money. If this is the first time you are disecting your outgoings to this level, I can almost promise you that you’ll find something that left your account that you no longer need or that you can cut in price.

When I did this for the first time, I realised I was subscribed to amazon prime on my own account, but also had access to my family account. I also noticed I was paying £25 a month for a phone contract, and knew I could cut that down by at least £10 per month - which I called up my provider and actually did. Two really quick and easy wins were made.

Step 4: Set up next months budget

Using the information you have infront of you, it’s time to allocate a budget towards next month. One rough outline that is good to follow is the 60/20/20 rule where 60% of your money goes towards needs, 20% towards wants and 20% towards savings. The goal really is to get as much into that savings bucket as you physically can.

In order to this, allocate your budget in the following order:

1. Needs

   For recurring things like rents and bills this should be really simple to do as I’m guessing the same amount leaves your account each month. For things that vary like groceries, use the data from the previous month to estimate what budget you’ll need for the next.

2. Savings

   That’s right, it’s time to pay your future self first, the moment your paycheck comes in, rather than seeing what’s left over at the end of each month (likely none). Try and hit that 20% mark if you can for savings, but in reality just allocate as much as you can that is left after your needs have been covered, and build upwards each month.

3. Wants

   Last but not least, it’s time to spend some money wherever you want it to go. It’s super important to have a portion of your money that you are able to spend without feeling guilty each month, and that is exactly what this bucket is!

Step 5: Keeping to it

The first month of budgeting can be tough. You’ll see that a lot of your estimations are different to what happens in reality. Don’t be too harsh on yourself, instead, use that data to inform a more realistic picture for the month after that.

Step 6: You might want to watch this instead (Private content JUST for this newsletter community)

Now this is a little bit different from my usual content, but I decided to create a video version of this weeks newsletter to help you get a better understanding of how to budget. In it, I break down the 5 steps above by practically applying them to my budgeting template.

Hit REPLY, ask me a question, and it might feature in next week's newsletter!

Whenever you're ready, there are ways I can help you.

1. ​Hit reply to this email: I respond to every single question I get from these newsletters, so please don’t be shy!

2. ​The Budgeting Template PRO: Most of you have probably tried the lite version, but the PRO is what I use in my day to day life. (use the code ‘letstalkmoney’ for 30% off)

^{DISCLAIMER: None of the above is financial advice. This newsletter is strictly education and should not be taken as investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and always do your own research.}