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Video Transcript Summary:
Hello, thank you for joining this free recorded training. I’m Brooke, and I am a Personal Finance Consultant at Money Life Mentor.
In this video, we will walk through how you can budget in a way that actually helps you build financial security and freedom month over month. So let’s get started!
Step one is to figure out what tool you want to use to track your monthly expenses.
Most people prefer to use a spreadsheet so that the functions do the math for you. I prefer using Google Sheets because that way I can access and edit my tracker from my phone or any other device on the go if needed.
If you want to steal my simple expense tracker template, there’s a link below this video so you can check that out afterwards.
It really does not matter what you use, as long as you choose a method that you feel comfortable with and that you think will be sustainable for you to review and update at least once a month.
I am going to walk us through an example budget to show you how I would approach setting up and filling out your expense tracker in a way that actually allows you to #1, holistically view the money you have coming in and going out every month, and #2 show you how much you can afford to save and invest each month.
Pull up your spreadsheet, and for step two you will add your income to the income section of your budget template. For this example, we’re using a $70,000 annual salary. You can use your paychecks to determine how much you earn every month before and after taxes.
Step three is to calculate your average monthly expenses.
Your expenses likely fluctuate a bit month over month, so what I like to do is take the average of the last 3 months.
This means that for every category, you add up the total spent for the last 3 months and then divide that total by three to give you the average monthly spend in each category.
This IS the most time consuming part, but it’s going to help you so much by knowing what you are actually spending in each category. You can also edit these categories — we all spend our money on different things, and have different things and experiences that bring us joy so be sure to edit the sheet to reflect your unique categories.
Now that our expenses and income are in the sheet, we can get strategic about what our goals are and where our money should be going.
Step four is to determine how much every month you contribute to your savings and investments. In this case, I’m going to assume this person set their goals and is using this part to plan out how much they are able to allocate for everything.
For savings goals, let’s say this person is saving for their wedding in 12 months. Maybe they have a joint account with their partner and they discussed how much they will each contribute. Let’s say in this case, this person’s goal contribution amount to the wedding fund is $15K, and they’ve already saved $5K so has $10,000 to go. If they have 12 more months, $10,000 divided by 12 is about $833 per month.
I won’t get into explaining the different investment vehicles in this video, but I will fill these out for this example to show you what is possible based on the numbers, and how that changes our numbers down below.
Most important number in this entire sheet, and arguably in your financial life, is right here — your SAVINGS RATE.
Your savings rate is simply the amount of money you save (or invest) divided by the amount you earn. Basically, it’s showing how much you are setting aside for saving and investing as a percentage of your total income.
Here’s a simple example: You earn $4,000 per month. In a typical month, you spend $3,000 and set aside the rest ($1,000) to put towards your savings and investments. Your savings rate is $1,000 / $4,000 which is 25%. This would be a great savings rate, I used simple numbers to give us easy math, but you get the point.
The more you can save and most importantly invest, the faster you can increase your net worth and, consequently, the sooner you can reach your retirement number.
Now, when we look at the savings rate, we see that the amount of money we’re saving or investing is X% of our total income. This is great!
This sheet now has our average expenses and income in it, so it will be a great reference when this person goes to review their actual monthly expenses at the end of the next month.
I’m going to duplicate this tab and use this new tab to do the budget for the next month. And when I do that, I’ll be able to compare it to what my average expenses have looked like.
As a step five, I highly recommend adding notes to the bottom of your budget sheet. What surprised you the most about your numbers? What is one category that you thought you spent way less in or much more? What changes would you like to make for next month? Becoming aware of where your money is going is the best way to take action and adjust your expenses, savings, and investing so that you can put your money to the best use possible.
If you want guidance on how to accelerate your financial freedom goals faster, reach out to me about one on one personal finance consulting. I’d love to help you use money as a tool to build your dream life.
Thank you for listening, and I hope you found this helpful!