Money Series - "How To Budget Monthly"

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Money management is one of those skills we are all expected to know but we are never taught how to do it! It is a skill we all learn as we get older but along the way we make horrible financial decisions. For most of my life, I swiped my cards carelessly and never paid attention to how much money was coming in vs how much was going out. By the time I graduated college and began my career, I knew I had to do better! For the past two years I have worked on my personal money habits and I started to apply what I learned in class. The key idea behind money management is cost management. Net income is the remaining balance when you subtract your costs/expenses from your profits. We would all love to control profits “I think I deserve a raise” “I don’t get paid enough for this” but in reality profit isn’t guaranteed and most importantly profits are not in our control. However, what is in control is cost. We have complete control of the costs we take in and that is why it is important to beware of it. Here is when budgeting is important, when you identify your costs you can see what you can and can’t afford, you can also include savings, vacation and debt as part of your “costs.” In budgeting, the remaining net income is your daily allowance to finance everything else not accounted for as a cost on a daily/weekly basis. Here is my guide to help you learn how to become financially stable by understanding the power of budgeting on a monthly basis.

Pro-Tip: Remember you are in complete control of your budget. It is up to you to put the work in and analyze what your habits.

Before we begin it is important to understand how you’re paid. Are you paid weekly, biweekly, semimonthly or monthly? Weekly pay means just that, bi-weekly pay means you’re paid every two weeks (every other week), semimonthly pay means you're paid twice a month usually on the 15th and on one of the last days of the month, and monthly pay means you’re on a salary paid once a month. Why does this matter? It is important to understand how and when your money comes in to be prepared to pay for your costs. People paid weekly receive 52 checks a year, biweekly receive 26 checks a year, semimonthly people receive 24 checks a year and monthly people receive 12 checks a year. Regardless, you earn the same amount at the end of the year and no matter how you’re paid you will be able to create a monthly budget.

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How to create a Monthly Budget:

Step #1 Fixed Expenses: Identify all of your fixed costs. These are costs that never change and you pay the same amount every month. For example: car payment and insurance, rent/mortgage, some utility bills, memberships and subscriptions such as amazon prime, Costco, Netflix/Hulu, Apple Music/Spotify, AAA, Gym, phone bill, loan repayment, cloud storage services and credit card annual fees.

Step #2 Faux Fixed Expenses: Identify all the costs that vary on a monthly basis but will be treated as "pretend fixed costs." These are small budgets you will set up for specific expense types. For example: groceries, gas, going out, travel, and other. An easy way to identify how much money to enter for your small budgets is to look back at your previous bank statements (at least 3 months) and figure out how much you usually spend in these areas.

Step #3 Calculate Net Income: Now that you figured out both fixed and faux fixed expenses you can find your net income (play money). Take one pay check and multiply it (if needed) to reflect your monthly revenue (weekly x4, biweekly x2, semimonthly x2). Take your revenue and subtract it by your fixed expenses and your faux fixed expenses. The remaining balance is your remaining cash after accounting for important reoccurring expenses. Take this remaining cash amount and divided it by the # of days in each month to find your daily spending allowance.

Net Income = Revenue - (Fixed expenses + Faux fixed expenses)

Daily Spending Allowance = Net income / # of days in current month

For example, let's say your spending allowance is $25 per day. That means you have $25 to pay for anything you want on that day. If you spend more than $25 Monday, say $27, then on Tuesday you will have $23 as your spending limit since you are accounting for the $2 overspent on Monday. Notice how if you under-spent on Monday, say $17, then on Tuesday your new limit is $33. If you want to save $100 for your weekly plans then in this scenario all you need to do is not spend for 4 days to accrue the $100.

Pro-Tip: if you don't like your daily allowance then I suggest going back to your faux fixed budgets (not fixed expense) and identify areas that can be eliminated and/or areas where you may have over calculated your monthly limit (ex. gas).

Note: it is important to note that you will use your daily spending allowance to pay for everything else not accounted for in your budget. For example: Donations, shopping for clothes, going out to eat/drink, entertainment such as movies and cover charges. Hygiene such as deodorant, haircuts, tp/etc.

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What do I do next? - Money Management

Now the "easy" part is to manage your daily spending allowance and also keep track of your current expenses charged against your small individual budgets. For example, adding up all the monthly gas fill ups you made against your gas budget. Did you stay under your limit, did you over do it? If you over spent you will need to account for it using your next month’s gas budget or account for it in your daily spending allowance. However, if you stayed within your limit you can roll it over to the next month or allocate towards something else!

Pro-Tip: keep a monthly journal to keep track of your faux fixed expenses every month.

Smart Phone Applications can help you manage your daily expenses. I personally use "Daily Budget" on the apple store. They have a free version and a paid version with more features. There you will be able to use add your revenue, expenses, and it will calculate your daily spending allowance for you. It is then up to you to keep track of your expenses. For android users, there is a similar app also called "daily budget" but I don't believe it is designed by the same people. I haven't found an android app that works as well as the iPhone version of "daily budget" I personally wouldn't use the apps that force you to integrate your bank accounts.

I have also created an excel file that operates similar to the above apps. You can find it here. I suggest you download this file and play around with it getting familiar with the way it works before you add your information. Start by adding your monthly revenues and fixed/faux expenses using the master budget columns then simply adjust if one month you're given a bonus or if you start a side hustle. You can keep track of your daily expenses using this file as well. Note: the file begins with January, if you're starting your budget on a different month all you need to do is change the name of the months and then change the formula for calculating your daily allowance for each month there after (update the number of days in the month). For example, starting budget in February, cell H12 should be changed from "=H10/31" to "=H10/28" and so on.

Pro-tip: use a credit card that earns points (cash or travel) and stop using your debit card for everything. Remember that each month you will pay off the statement balance to avoid paying interest. If you decide to do this, remember that the money in your checking account it untouchable since you are keeping track of your expenses using the apps or excel file. The money there will be used to pay off the card. Two benefits: credit will be restored over time and credit cards have more protections compared to regular debit cards.

Magical 3rd/5th check for weekly and bi-weekly paid individuals

Weekly

If you are paid weekly you have a slight advantage using a monthly budget. Weekly paid individuals receive 52 checks a year which means there are 4 times a year where you’re going to get paid 5 times in a month vs only 4. If you budget for 4 checks per month, then that 5th paycheck would technically be “extra” money. You really don’t have to believe in it or not, but just understand if you only budget for 4 checks and a 5th one comes in, you can do whatever you would like with that “extra” money. You can read extensively about this on a Chris "Money Peach" article here. Note: this does not work for semimonthly and monthly paid individuals.

Bi-Weekly

If you are paid bi-weekly you also have a slight advantage using a monthly budget (those paid every other week). Since you are constructing your budget using monthly scheme i.e. accounting for expenses using only 2 checks a month. Bi-weekly paid individuals receive 26 checks a year, you will notice that there are 2 months during the year where you're paid 3 times! Since that 3rd check is unaccounted for in your budget, that check is technically "extra money" you can use for anything you want. You can use it to save it as an emergency fund, go shopping or go on vacation! You can read extensively about this on a Chris "Money Peach" article here. Note: this does not work for semimonthly and monthly paid individuals.

Final Thoughts

There are many advantages to create a monthly budget. You will account for important expenses you no longer have to stress about having enough money for. Which means you will not feel guilty spending your daily allowance on whatever you want. Constructing a monthly budget takes about three months of tweaking to get it working just for your needs so don't give up if it doesn't work initially! This budget has helped me stay financially stable for the past two years and has really helped me understand more about my money habits. I am hoping that this article helps you as well!

Feel free to email me at ofriceandcities@gmail.com if you enjoyed the article, if you are creating a monthly budget and tried my advice. I would love to hear about your financial path and answer any questions you may have.

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