A Simple Budget to Get Started is All You Need

The dreaded “B” word. Budget. Budgets are one of the most commonly ignored financial principles. But they don’t need to be! They can be complicated, but a simple budget to get started is the best way to overcome any budgeting fears.

Budgets are simply understanding and tracking incomes and expenses. These two basic financial principles are all you need to understand your personal cash flow. What is going in your pocket and what is going out of your pocket each month. Budgets can become more complicated when you start placing expenses into categories: food, entertainment, housing, utilities, etc. However, when starting to create a budget, focusing on income and expenses is the best and most straightforward start.

Let’s explore why a simple budget is the best.

What is a Budget and Why Do People Use Budgets?

Before we start going into how a simple budget is the best route, to begin with, let’s discuss what a budget is and why people use them.

A budget is a tracking tool that is used to analyze income and expenses.

People use budgets to rein in spending on “wants” versus “needs”.

The most hard-core budgeters will track every single purchase and categorize it into spending buckets.

The most common budget categories include:

• Mortgage or Rent
• Auto & gas
• Child Care
• Shopping
• Food and Dining
• Bills & Utilities
• Entertainment
• Other

Notice, I said these are the most “common” categories. Each of these categories could have sub-categories and even sub-sub-categories. Depending on your level of commitment towards budgeting, this can be extremely complicated, or super simple.

This is the point where people tend to get overwhelmed by budgets and give them up entirely.

I think you should have a budget, I think everyone should have a budget. Most of the time, the simplest answer is the best answer.

What Makes it a Simple Budget?

I don’t advocate for people to start off with over-complicated budgets. It can overwhelm and deter you right away. Not to mention it could be very hard to sustain long-term.

Let’s start with a simple budget.

So simple, there are only 2 numbers we are concerned about:

• Income
• Expenses

One of these may be more complicated than the other. You can probably guess it’s Expenses, but let’s dig into these two numbers.

Income

The first, and probably easiest to understand, is Income.

Income is money that you receive.

For most people, there is only one source of income. Earned Income from a job. This would be your weekly or bi-weekly paychecks from your job. Regardless if you are an hourly or salary employee, this is regular income.

But there is other Income people receive. These include:

• Dividends
• Capital Gains
• Royalties
• Pensions
• Rental Income
• Side Hustles

For a good overview of other types of Income, read this article on the 3 Types of Income.

Starting with how much money you receive on a monthly basis is the first step of a simple budget.

Next, let’s look at Expenses.

Expenses

Next, if Income is money that you receive, then Expenses are the opposite.

Expenses are payments when you give money to others in exchange for goods and services.

Above, I outlined common categories where people track their spending: mortgage or rent, auto payments, food, shopping, utilities, bills, etc.

Many of these Expenses are re-occurring, such as housing, auto, and utilities. These types of Expenses are less “variable” than others. Meaning, your mortgage or auto payment doesn’t change from month to month,

On the other hand, some Expenses can vary. Food and Dining is a good example. You may go out to a restaurant for dinner once last week, and the next week you go out 5 times.

The categories that have higher variability, are prime categories people like to set limits or budgets.

But that is not what we want to focus on for a Simple Budget. We can drill down expenses to the penny, but people who enjoy that are few and far between. Now that we’ve established the two numbers we need for a Simple Budget, let’s see how you can utilize them.

What to do with Income and Expenses?

Knowing your Income and Expenses is a great start!

But they’re just two numbers, what can we do with two numbers?

The most important thing to do with these two numbers is to find the difference between Income and Expenses.

If this sounds familiar to you, it’s because it’s the same idea as Earnings that you would see on a business’s financial statement, Income Statement. After you take all the money you made (Revenue) and subtract everything it took to make that revenue (Expenses), everything that’s left over is for you to keep.

The same idea holds true for personal finance and budgets. You take your income (the money from your paychecks or other assets) and spend money on monthly expenses (housing, auto, etc.), and whatever is left over stays in your bank account.

While knowing the difference between Income and Expenses is a good thing, there are also other goals that can be made off of these two numbers.

Setting Goals Using a Simple Budget

There can be a variety of goals when it comes to personal finance. Some of these goals include:

• Raising Income
• Lowering Expenses
• Raise Income and Expenses at the same rate
• Maintain Income/Expenses
• Income is greater than Expenses

Depending on what stage you are at in life, single, married, family of 5, empty-nester, whatever, focusing on one or more of these goals should be easily attainable.

All these goals can be achieved if you first start by measuring them.

Measuring Goals

While setting goals is important, measuring them is equally important.

However, that is the beauty of having a simple budget. By focusing on only 2 numbers, you can set, measure, and achieve many financial goals.

Right from the beginning, if you know your monthly income and expenses, you can tell which one is greater than the other. A great goal to have, having your Income greater than Expenses, is easy to measure. The best part is that if your Income is greater, then you have the flexibility to do other things like:

• Increase Savings
• Build an Emergency Fund
• Invest in Stock Market
• Pay off Debt

All these are achievable if you are able to track and measure at a high level.

Personal Cash Flow Using a Simple Budget

Earlier I described the difference between your Income and Expenses being the same as an Income Statement you’d see on a financial report. But we can also think of a simple budget as a way to measure personal cash flow.

Simply put, a Cash Flow Statement measures the flow of cash within a business to help determine at any time how much cash a business has on hand.

Remember, “Cash is King.“

This principle applies to personal finance. Ideally, you would pay for all expenses with cash. Using credit cards is a slippery slope where that interest can cause a negative compounding effect.

How do you make sure you pay all expenses with cash?

Make sure your Income is greater than your expenses.

The cash you bring home at the end of the day, you use for your daily needs, and then anything left over you save and invest.

All this can be achieved, by using a simple budget.

Simple Budget Tool

Ready to get started on your simple budget?

Allow me to help.

Below is a picture of all you need for a simple monthly budget. Each year and each month, start by tracking your monthly Income and Expenses. Subtract your Expenses from your Income and that Balance is what is left over.

From tracking these 12 months’ worth of data, you can tell which months you spend the most (probably the months near the holidays) and the months you spend the least.

This tool will do wonders for tracking and monitoring the goals you’ve set.

Summary of a Simple Budget

Two numbers.

That’s it. Two numbers are all you need to create a simple budget.

You can get more complicated if you’d like, but starting is always the hardest.

“The hardest part is starting. Once you get that out of the way, you’ll find the rest of the journey much easier.”

-Simon Sinek

But once you get started, managing two monthly numbers is achievable! Income. Expenses.

From there, you can measure and track goals around these numbers.

My favorite goal, which should be your favorite too, is making sure your Income is greater than your Expenses. This surplus of cash is critical when it comes to advancing your wealth. You can invest, add to emergency funds, save for future purchases, etc.

Simple is the key.

If you use a simple budget to get started, that will be key to setting you up in the future.

Thanks for reading, I hope this helps dissipate any fears of the dreaded “B” word. Budget.

Now that you’ve mastered the simple budget, read this next article on 7 Reasons Why You Need an Emergency Fund to help get you started toward investing.

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Disclaimer

Levelzeroinvestor.com is not a registered investment, legal or tax advisor or a broker/dealer. All investments / financial opinions expressed by Levelzeroinvestor.com are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.