Build a better budget
insights from three budgeting nerds
Quality matters. Think investing in the name-brand stroller versus the cheap one with the crappy wheels, or if you don't do strollers, maybe shoes. Sure, a shoe is a shoe, but fewer blisters, sore feet, and overall, a nice experience matter. It’s the difference between working out once and training for that race.
The quality and set-up of your budget matters. When people say their budget doesn’t work or they hate budgeting, I tend to find that they don’t have a quality system. They haven’t found what works for them!
Today, I want to talk about best practices and the nitty-gritty of what works when making a budget. What is a budget? Why should you have one? What do you need to build a better budget? I am joined by Bethel Habte, a fellow AFC candidate and the writer behind Deconstructing Money and Ellen Forrest, one of the founders behind the Accountable Budget app and Substack, who have their own opinions about budgets and have spent considerable time thinking about them as I have. I hope their insights get you thinking about how to build a better budget!
The best budget is the one you use. It’s the one that you find helpful for achieving your goals.
What is a budget?
Taylor: I like to think of a budget as a plan. It’s a plan for how you want to spend your money, given your obligations, goals, and desires. It is one tool in your toolbox - but an important one.
Bethel: A budget is a set of small intentions. It states how you want to spend your money at the beginning of the month and tells you how you’ve measured up to those intentions at the end of the month. The best budgets are realistic and not aspirational. They’re flexible, forgiving, balanced and they help you use your financial resources in ways you can be proud of. As I’ve said in a past Deconstructing Money post, everyone already has a budget. Everyone already has money coming in and going out of their budgets. A written budget allows you to actually see how that money is moving and make some goals for yourself as you enter a new month of spending. It tells you if your intentions and your actions are aligned and helps you not lie to yourself about that.
Ellen: A budget is your roadmap to reaching financial goals. By setting clear parameters around spending and saving, you're laying the foundation for long-term financial security.
Why budget?
Taylor: I budget as
a way to keep track of our true expenses
a point of conversation and planning for us as a couple.
a way to inform intentional choices about money. There are tread-offs!
a plan on how we are going to spend within what we can afford
Bethel: Budgets are for people who want to be strategic about where their money is going and not blind to what is happening to it.
It’s really hard to plan for the future or figure out how much you can spend, save or invest without a budget. If you can do all of that without a budget, you’re either some kind of machine or wealthy enough to not worry in the slightest about covering your current and future expenses.
Budgets can help us understand and accept our current lifestyles and make changes we can live with. They help us come face to face with the reality of our situations.
For people who are angry or impatient with their current reality, it can be really hard to budget! But when you are ready, a budget can help you understand whether or not your expectations for yourself and your money are aligned with reality, and take tangible steps to reach that alignment.
Ellen: Sticking to a budget keeps your focus on what you can control and succeeding at it builds the confidence needed to tackle bigger goals like buying a home or paying off debt.
Where to start
Taylor: Talking to people who have worked for years as financial counselors, they say almost every client they've ever had starts with tracking their spending. Most of us don’t know how much we spend each week, month, or year, let alone on any given category! It’s an eye-opening experience that can help unearth saving opportunities or clarify what trade-offs are being made.
Bethel: I would recommend building your own budget. At the beginning of the month, open a Google sheet and list off your monthly needs and how much they cost. Then do the same for your wants and monthly savings goals. Add a line for a generous amount of buffer in your wants and needs sections for anything you’ve forgotten or underestimated. Get all of these numbers to total just under how much you bring in each month. Give every dollar a job.
Then track your expenses in that same spreadsheet and calculate how much you’re actually spending in each category (I have a template with handy formulas for this that I use with my clients. It’s aesthetically pleasing, too!). When you track these expenses, note whether they’re a need or a want. If they’re a want, ask yourself if it was worth it with a “yes” or “no.” This is a simple yet effective exercise to help you recognize where you’re actually getting value from your purchases and help you feel less guilty about spending in ways that align with your true desires.
Your first budget is like your first pancake - it’s bound to be janky and imperfect. Forgive yourself for underestimating how much you’re spending in certain areas of your life (that’s typically what people realize). This first budget is there for you to gather data. You’ll understand yourself and your spending even more the next time you try.
Your first budget is like your first pancake - it’s bound to be janky and imperfect.
Ellen: When getting started, keep these three key things in mind:
Take your time creating a budget that works for you. Begin by simply categorizing your transactions for at least a month. In the Accountable budgeting app, you can create custom categories and sort transactions yourself to get familiar with your spending habits. Once you have a clear picture, start setting realistic goals for each category and track your progress.
The essential pieces
Taylor: A quality budget needs to check a few basic boxes,
it should be a forward-looking plan
it should be based in reality
This means you should understand your actual expenses well and be realistic about costs.
I like to use the USDA’s monthly cost of food reports to ground myself and my expectations about how much I ‘should’ be spending on groceries. Given the current price of food, it will cost $193.20/week to feed my family of four “a nutritions, practical, cost-effective diet.”
it should include a plan for non-monthly expenses
there should be built-in flexibility
it should be convenient
To me, this means automated by using credit cards and a budget app that syncs and complies all our family’s transactions.
Bethel:
A generous miscellaneous category for hard-to-categorize expenses
A buffer line to pad spending you didn’t expect
New budget lines for one-off purchases in any given month
The “was it worth it” question described above
Formulas to do math for you
Ellen:
Categorize your transactions every day. While it might seem tedious, this daily habit keeps you engaged with your finances. The more in tune you are with where your money goes, the easier it becomes to make meaningful changes that align with your goals.
Decide what’s worth your money—and what isn’t.
Spend intentionally. Prioritize the things that add value, joy, or purpose to your life, and cut back on what doesn’t.
Budget solutions
What if I’m paid bi-weekly, but my bills are monthly? (Taylor)
I tend to budget on a longer time scale, which fixes this problem! Based on our modeled lifetime resources, I have a yearly spending cap and a weekly flexible spending number. This means I don’t pay much attention to when we are paid. I know how much our set bills will be and have an estimate of non-monthly expenses. That leaves me to focus on the variable, discretionary spending, which I tend to divide over the year so I can think about it on a time scale that works for us.
Do I have to manually enter my expenses? (Bethel)
I’d say yes, especially when you start budgeting. Automation is wonderful in areas of your life that you don’t want to think about. For example, if you’re in that aforementioned category of people that are wealthy enough to not worry about where their money is going and whether it’s being put to its best use, setting up autopay for your credit cards is a great move. Why think about it? But if you’re interested in making sure your spending is aligning with your goals and serving your life in the best way it can, it’s helpful to slow down and take a close look at your expenses to both affirm spending you know adds value to your life and curb spending that truly doesn’t.
I am so stupidly proud of the pancake analogy lol came up during a client session and I've been running with it ever since
Grounding a budget in reality is so logical but I feel like this is a major reason why people struggle here. Getting started is always the hardest part to anything and being honest with yourself and situation is the only way to be successful. Having a plan you can trust will lead to consistency and positive decision making.