A Five Step Plan to Putting Together a Budget (and Why I Hate the Word!)
Those that know me know that I hate the word budget. And I’m not shy about it. Hearing the word actually makes me cringe and conjures up images of my favorite expenses being ripped from my hands while I’m holding on to them for dear life. It’s a word full of restriction.
Many believe that sticking with a budget means that they’ll have to limit their fun but I’ve found the opposite to be true. That’s why I decided to swap the term budget for happiness allocation.
What’s a happiness allocation?
A happiness allocation is a lot more fitting of a term than budget because all a budget is, is a plan to allocate our money in ways that will make us the happiest in both the short and long-term.
Budgets are liberating because having a plan gives us peace of mind that we will hit our goals by when we plan to. It also allows us to spend on the things that are important to us without feeling guilty because we know that we can (and how much of it we can do) without interrupting our broader goals. Without a plan, I find most of my non-essential spending makes me feel guilty, which is no fun.
Facing our spending.
Many believe that not knowing what’s happening with their money is a lot less stressful than knowing. They are afraid of what we might find if they face the numbers.
But in reality, the opposite is true. Yes, it can be a big challenge to look and see what’s happening with our money, but until we do, we can’t do anything about it. And there’s no power in that.
One of the most liberating things I’ve ever done in my financial life was put together a budget. It gave me the freedom to stay in a job I preferred, despite taking a pay cut, and later leave my corporate job to run the Fiscal Femme full-time.
If you want to give budgeting (a more fun way) a try, here are the five steps to putting together a liberating happiness allocation.
1. Calculate what you “really” earn.
We start with the top half of our happiness allocation, which is all about our income. Many think their income is the amount of money they earn per month (divided by twelve). And they plan accordingly.
Unfortunately (or fortunately - yay streets and schools) what we get to keep is a very different number.
In order to map out a realistic financial plan, we want to use the number that actually hits our bank accounts. You can login to your checking account and see what amount has hit your account over the last few paychecks (sometimes there are a couple different amounts) or use a payroll calculator to see exactly where it’s going.
I’m a big fan of seeing an annual total as well as a monthly breakdown. To make it easier, I made this budgeting spreadsheet for you that I use with all my clients.
Start by entering in your income for the next twelve months. If you have multiple income streams, each should get its own row.
If you are an entrepreneur, work on commission, or have income that varies, do your best to estimate what you think you’ll earn over the next twelve months. The happiness allocation isn’t the place for reach goals - I like to be conservative with income estimates here and do my income goals in a separate place.
2. List out all of your expenses.
Next, we move on to our expenses. If we’re being honest, many of us have no idea where our money is going. Maybe we don’t want to know, but even when we do, technology makes it really hard to get a handle on our spending. Think about it. We hop in and out of Ubers without paying, we click a button and things are delivered to our doorstep, and we swipe credit cards which feels a lot different than cash.
In order to make an accurate happiness allocation, it’s time to reconnect with where our money is going. Start by listing out each and every one of your expenses. For now, you can leave out the amounts and just include the categories (the item). For example: groceries, rent, dining out, etc.
If you are using the budgeting spreadsheet, you can give each expense item its own row.
It’s inevitable that you’ll forget an expense and remember it later. Over time, your expenses may change - some might leave the list and others will get added. This won’t be a perfect list. Think of it as a living document that can change over time. If you remember one you forgot, add it to the list!
3. Add the numbers to our expense list.
Once we have a list we’re happy with, it’s time to add the numbers. This is no small feat but I promise, it’s worth taking the time to do.
Go through each expense and think about your next twelve months. How much do you plan to spend in each of these categories? Some expenses, like our rent or mortgage, will look the same each month. Other expenses are one-time things (i.e. travel + holiday spending) and others vary week by week (i.e. groceries + dining out).
To enter a weekly expense by month in the budgeting spreadsheet you can multiply the weekly expense by 52 (52 weeks per year) and divide by 12 (12 months per year). With one-time or infrequent expenses, we can include them in the month we plan to pay for them, unless we use strategies to smooth them out by using sinking funds.
4. Put it all together.
Once we have our income and our expenses entered into our happiness allocation, we can put it all together using what I call the Golden Rule of Personal Finance. To apply the golden rule, we take our annual income and subtract our annual expenses. What’s left is what we have available to allocate towards our goals.
Annual Income - Annual Expenses = Available Funds for Our Goals that Year
It’s simple subtraction! This is why we don’t have to be good at math to be good with money.
If you are using the budgeting spreadsheet, the math will be done for you. You’ll be able to see how much is available for your goals for the year (and each month) by looking at ‘profit’ line.
5. What now?
For most of us, when we put together our happiness allocation for the first time, the result isn’t too pretty. And that’s okay! We’re either not saving as much as we’d like for our goals or most often, we’re spending more than we’re earning.
It’s important to remember that this was happening whether or not we were aware of it. Now that we have full information, we can do something about it.
The first thing to take into consideration is that many of our happiness allocations won’t be accurate at first. I usually find that we overestimate in some areas and underestimate in others.
We can do a happiness allocation reality check by looking at a few of our credit card statements or keeping a money journal to see if our plan reflects reality. If it doesn’t, we can adjust.
While we can improve and adjust our happiness allocations, they will never be perfect. It’s important not to give up any time our happiness allocations don’t reflect reality or when we make a mistake. That’s completely normal and to be expected as a part of the process.
Once we’re more confident in the accuracy of our happiness allocation numbers, we are either happy with the result (most of us aren’t at first!) or we decide to reallocate some things. Most often seeing our expenses on an annual basis is enough to preempt some changes, and just by being aware we let go of some things that are less important. More often than not it’s a subtle shift so you might not expect that your expenses will decrease but you look back to find they have, without too much effort.
In Conclusion
A happiness allocation is a much more fitting term for a budget because it’s just a plan to allocate our money in the ways that are going to make us the happiest in the short and long-term. While we often think of budgets as restrictive or limiting our fun, they are usually the opposite and give us tremendous freedom.
I created a spreadsheet for budgeting for you that I use with all of my clients to simplify the process. We take our annual income minus our annual expenses, and that’s how much is available to allocate towards our goals. It will take time to get this all down, but I promise it’s worth the effort for our peace of mind and to reach our financial goals. It’s okay to do this in small steps!