How To Budget - Part 1: Income

Since my wife and I started our own journey to take control of our finances, and after talking to numerous other people on the same journey, I am convinced that the single biggest tactical change is budgeting. On this journey from financial complacency to financial independence, most of us start at a point where we have no idea where our money is going. We just know there's not as much of it at the end of the month as there ought to be. Budgeting is the key to turning the corner. It's also where many people get stuck, a relatively simple (not necessarily easy) step that tends to derail progress.

To help, this post will be the first in a 3-part series to help increase your budgeting success. In the first part, we'll look at how to create an effective budget starting with your income. Part 2 will cover the expense side of the equation. Finally, the series will wrap up with some ways to actually stick to the budget. So, without further delay, let's dive in.

In my personal experience, creating a zero-based budget was one of the keys to my success. Also called a zero-sum budget, it may sound intimidating at first, but it really is quite simple. Creating a zero-based budget is really just putting together a plan for every dollar of your income. Income - Outgo = 0. Like a simple math equation. Now, don't take that to mean you should spend every dollar of your income. Planning for saving is part of the "Outgo" equation. If I were to create an actual math equation, it would look something like this:

Income - (Savings + Expenses + Debt Payments) = 0

Regardless, there is a plan for your entire income. Before coming across Dave Ramsey, I tried creating other styles of budgets. Typically, these involve budgeting certain percentages, or planning for necessary and unnecessary expenses and having some left over. This left-over part always tripped me up. It was unaccounted for money, so I would always end up spending it, leading to me spending way more than I intended, usually on those unnecessary categories. Creating a plan that tells every dollar where to go has two key advantages:

1. It makes you aware of your cash flow, even before you spend your money. You know how much margin you do (or don't) have in your budget. This helps discourage overspending. (No budget will ever prevent overspending. Only you can do that).

2. You will know your goals and have a plan to meet them. Want to save for that $3,000 vacation next year? You can figure out exactly how much you need to be putting away for it. Then you will know whether it is realistic or not.

So, how do you go about creating a zero-based budget? Start with your income. You want to be using your take home pay: what you actually get in your paycheck after taxes and everything else. Whether you do this electronically (budgeting apps like EveryDollar or YNAB) or actually write it out on paper, your income is the first step. This should include all sources of income: your main jobs, any secondary jobs, dividends from

investments, etc. This is easy if you are salaried or have very consistent hours in an hourly job. Your paychecks will be very similar every time. If your income is more variable, looking back over 5-10 paychecks will help you get a good average.

Important Note: If for some reason your income taxes are not taken out of your check before you get it, account for this first! You should be setting aside enough to cover your taxes before anything else.

The more irregular your income, the harder this part of the budget will be. Some people make drastically more in certain seasons than others. There are some things you can do to help with this.

1. Find another source of income for your slower seasons. This may not always be possible, but if you can pick up a second job it can help keep the dips in your income from being so dramatic. If you run your own business, look for secondary income streams.

2. If your budget can handle it, plan for the lower end of what you can reasonably expect. If you know, you can pretty much always bring home $3,000 a month, plan your budget around that. If you bring in more than that, you can allocate the extra accordingly.

3. Create an income buffer account. Basically, you put money into this account during higher income months to get you through the lower income months. As a very simple example: Your expenses are $3,000 per month. For 8 months of the year, you bring home $4,000 dollars per month, but for the other 4 months you only bring home $2,000. That means you have a $1,000 shortfall (expenses more than your monthly income) for those 4 months. You need to put $4,000 away in an account to make up the difference. So, for those 8 higher-income months, put $500 per month in the account.

These are just some ideas, but no matter your income situation, you need to have a clear picture of what money you have coming in. A monthly cash flow plan (budget) is absolutely critical to putting your financial ducks in a row, and that starts with your income. If you haven’t already, calculate and write down your monthly income. If it’s hard to predict, write down your income from the last full month. In the next part, we’ll use this as we dive into the expense side of budgeting.

If you are struggling and need help with any part of budgeting or getting control of your financial life, I’m here to help. Reach out, and we’ll work through your obstacles together.