How to Make a Budget

“Don’t tell me what you value, show me your budget, and I’ll tell you what you value.”
-Joe Biden
My stance on budgets is probably a little different than what the experts say. To be honest with you, I don’t actually know what the experts say but they probably get a hard-on for budgets. A budget is really a tool that is best used in the beginning while you get used to working on your saving habits.
I’m more of a “throw me into the fire and I’ll figure it out” kind of guy, so I believe auto deposits are still the most important thing. Trust me auto deposits from your paychecks into your savings while make you develop a budget real quick because if you fuck up your spending you’ll end up on the streets.
On the other hand, I always talk about treating your life like a business and businesses have budgets soooo I guess you should too.
Once you get your habits down you probably won’t need a budget to tell you when you can go out to eat or what you can buy. Being good with money becomes a lifestyle so you won’t even think about your budgets once you get good and start saving money like a mad man (or woman).
Making budgets was probably hard as fuck 20 years ago but now everything is digital and all of your transactions can be accessed right from your bank app (unless you are a weirdo who still uses cash). Some banks have better spending tracking and budget features than others so I recommend using Mint.
Mint allows you to log into your bank account so all transactions and income can be tracked. It will show you your cash flow and even make suggested budgets for you. We are going to talk about some spending categories in this post and Mint will automatically categorize your spending for you. I know when I opened Mint for the first time I got slapped in the pee pee by the amount I spent on food. It definitely didn’t take a financial adviser to see what my issue was.
The first place to start is to calculate your monthly income. This should be pretty easy for most people who get two paychecks a month (just add em up). If you are someone that has variable monthly income, it will be a little more challenging but it shouldn’t be too hard to figure out your average monthly income. For this example, we are going to use our friend Steve.
Steve’s monthly income is $4000 from working as a potato farmer. Steve is 25 years old and enjoys hangin’ with friends and traveling around Idaho to hike. Let’s see how we can help Steve save money.
After we have our income we need to categorize our expenses with my patented 3 Tier Expense System. I didn’t actually patent it but I did invent it.
Tier 1- Expenses that are necessary and recur ever month. This is where you spend money to keep the lights on and live a comfortable life. We won’t be adjusting anything in the Tier 1 category when we look at ways to save money.
Tier 2 – These are things that you spend money on every day that are necessary but are also variable. Things like gas and food. You need to eat food, but how you do it can have a big impact on your bank account. We can definitely make some guidelines for these to help save some dough. Use your common sense here, if you are spending $200 every time you go to the grocery store then that should be a red flag.
Tier 3 – In Tier 3 we have all the expenses that we could cut out completely or reduce dramatically without having a big impact on our lives. These are things like amazon purchases, entertainment, bar tabs, subscription services, etc.
Tier 1
It’s important to differentiate a necessary bill from a bill that you could eliminate if you wanted to. For example, Internet is something that no one is ever going to cut out but your Hulu and Netflix accounts are things that we will leave in Tier 3 expenses. I’m not saying that we are going to get rid of these things, we just don’t want to count them as necessary right now.
When starting out, think about the big stuff first. If you get a coffee once a week, don’t try to get rid of that first to save 20 bucks a month.
Steve’s Tier 1 expenses:
Rent: $1000
Internet: $50
Phone: $100
Car Payment: $200
Car Insurance $150
Health Insurance: $100
Student Loans: $400
Total: $2,000
This is pretty average for a lot of people. Nothing particularly wrong with this. All stuff that everyone needs to get by. Your Tier 1 expenses should always be the bulk of your expenses and if your Tier 2 and 3 expenses are more than Tier 1, then you have a big problem.
Tier 2
Don’t get it twisted, Tier 2 expenses are often just as important as the tier 1 expenses. The only difference is that the dollar amount changes every month and you can make a conscious effort to save on these expenses. You can try all you want but you aren’t going to be able to convince Verizon to cut you a break on your phone bill.
The biggest expenses in Tier 2 are usually food and gas. I’m not a huge fan of creating a million little micro categories for expenses because it gets hard to keep up with, however, I do think it’s important to separate groceries from restaurants. I also lump in household stuff into groceries because I think it’s stupid to have a separate budget for toilet paper.
Here’s Steve’s Tier 2 expenses:
Gas: $250
Groceries/Household: $400
Restaurants/Take Out: $160
Total: $810
Tier 3
This is the category for discretionary spending and usually what kills people whether they know it or not. You gotta be real with yourself when differentiating between in Tier 2 and Tier 3. Do you need the expense to live or is it a luxury?
Here’s Steve’s Tier 3 expenses
Cable TV: $100
Bar: $150
Netflix and Hulu: $26
Clothes: $50
Shopping: $200
Entertainment: $200
Total: $726
Total monthly expenses: $3,536
Cash Flow = Income – Expenses
$4000-$3,536 = $464
With Steve’s current expenses, he would be saving about 500 bucks a month. The easiest way to start saving money is to see if you can cut Tier 3 expenses in half. Once you get all your expenses laid out, see if you can start with chopping off the stuff you don’t need. For example, if you spend $200 bucks shopping every month life Stevie does, set your budget at $100 in Mint. Mint will then tell you that hit your budget and then it’s on you to have the self-control to stop spending.
If we cut entertainment, shopping, and bar expenses in half, then we can now save an extra $350 a month. Cut out cable and we would be at just about 1000 a month (do people still pay for cable?).
You really won’t be able to tell what needs to be cut out until you lay everything out. Don’t cancel your Netflix subscription to save 15 bucks a month when you can shave expenses on your high spending categories.
Current savings per month: $950
Then we move to Tier 2. Maybe Steve could try saving 50 bucks a month on groceries, and 60 bucks a month on eating out. This could be as simple as skipping lunch with co-workers 1 day a week and only buying the items that are on sale at the grocery store.
What I’m trying to get at is that most of these changes will barely affect your life.
The idea is to just get yourself to start thinking about each purchase every time you take out your card. I’m really not a fan of setting hard budgets because that means you need to be extremely self-disciplined to keep them. That doesn’t work for a lot of people. It’s all about forming new habits.
By cutting down the Tier 3 expenses and shaving a little off the Tier 2 expenses we got Steve saving $1060 a month compared to $464 a month. Don’t make budgeting complicated. It really doesn’t have to be. All it takes is for you to sit down and look everything over so you have an idea of what you need to change.
Why is this important?
Obviously, I was gonna tie investing into this one way or another. Once you start stacking good months on top of one another it has a powerful effect when combined with compound interest.
Let’s say the original Steve who puts away $464 a month starts investing and gets an average annual return of 10% per year. Steve is 25 years old and plans on retiring when he’s 65. Over 40 years, Steve would end up with $2.7 million by investing $464 a month.
Now let’s look at new and improved Steve who is saving $1060 per month. Steve would end up with $6.1 million after 40 years of investing at 10% return. By going to the bar half as much, cutting out some lunches, and shopping less, Steve would have increased his net worth $3.4 million.
All of this shit seems little but I’m telling you it adds up over a lifetime and nothing is going to change unless you make it change. Budgeting is kind of like training wheels, it can get you started and keep you on track, but once you learn how to save you won’t have to continuously make budgets.

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