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How to Set up a Personal Budget



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Setting up a personal budget with automatic transfers helps you save quickly and think less about what you’re “allowed” to spend!

It surprises me that despite having a bachelor’s degree in finance that I was still completely clueless about personal finance. Sure, I took a class on personal finance but it all seemed pretty arbitrary at the time. And after college, it was even more of a mess in terms of what do I save, what do I spend, and how do I set that all up? I ended up reaching out to an advisor who helped me lay out a seemingly complicated but surprisingly straightforward approach to personal budgeting.

Basic Terms To Understand

  • Gross Income – this is your income before taxes and other deductions like social security and 401k contributions. This is your base salary!
  • Net Income – this is your income after taxes and deductions. This is what you see deposited into your bank account when your paycheck hits.
  • 401k – employer-sponsored retirement savings account that is deducted from your check automatically, and usually matched!

My Number One Rule

If your employer offers a 401k match, participate, now. No ifs, and, or buts. Sure, retirement may be far off for you, but your employer is quite literally offering you free money. Participate up to the amount they match.

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What this means is that if your employer lists one of their benefits as “a 50% match up to 3% of your income,” that you should at least be contributing 3% of your income. Let’s do the math. Let’s say you make $60,000. 3% of $60,000 is $1800. Now, 50% of $1800 is $900. That is a FREE $900 per year from your employer. Who says no to that? (Your employer’s plan usually just lets you pick a percentage, so you don’t have to do the math).

Work Through a Budget Spreadsheet

I have started and stopped a budget about a dozen times if not more. They’re intimidating, they’re frustrating and they take some work and self-reflection. By self-reflection, I mean going line by line in your banking app and understanding what you pay for each month, and trying not to judge yourself. But the cool thing is that once you set this whole budget thing up, you’ll be able to spend a portion of your income judgment-free!

Here’s a great resource for finding a spreadsheet to work with: Free Monthly Budget Spreadsheet For Excel & PDF. Break down your monthly expenses, rent, utilities, car payment, vet bills, coffee subscription (my personal favorite). Etc. Understand what you are spending month over month and what’s leftover. This requires going line by line on your bank statements. Take your time, catch the little outliers like Spotify, Netflix, Apple iCloud, if it hits your bank, account for it. Then, we’re going to take that leftover amount and divvy it up into spending, savings, and potentially debt payments (hit the high-interest ones first!).

As you’re going through the exercise it comes down to a pretty simple breakdown of income, expenses (bills), savings, and spending.

Set Up Multiple Accounts

Once you confidently understand your net income, next you should understand what percentage goes to bills, spending, and savings. I shoot to save 25% of my net income (that’s after-tax money, remember? This will also be your income after your 401k contributions so you don’t need to do the math there).

My bills are usually about 60% of my income. 100% – 60% – 25% = 15% left! That 15% is the portion you get to spend guilt-free!

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Now, this is the fun part. Or, the frustrating part if you don’t actually like numbers.

“I’ve found that using several bank accounts can make it easier to budget and spend less. Yes, maintaining several accounts requires a bit of logistics. But thanks to the proliferation of free online banks, it doesn’t have to cost anything.” (Using Multiple Bank Accounts to Control Your Spending)

I have it set up as “bills” (checking account, bank #1), “savings” (savings account, bank #1), “spending” (checking account, bank #2), and “spending savings” (savings account, bank #2). 

This is where it gets a little tricky. You can set up automatic recurring transfers with your bank. If you use a bigger bank, you can probably google how to do it. But, if you use a smaller Credit Union you may have to give them a call. 

Remember that budget spreadsheet you set up? Let’s keep going with that $60,000 gross income example I used earlier. Let’s say for the sake of round numbers that after-tax you make $50,000. That’s about $4,000 a month. If your bills are 60% of your income, account to keep 60% of $4,000 in your “bills account” aka $2,400. You don’t have to set anything up for this, as your bills account is the one your paycheck posts to. 

Next! What’s left for spending and savings? $4,000 – $2,400 = $1,600. Cool. You’ve made it this far now we just have to figure out what goes into savings. Let’s go with 25% (this could be more, it could be less, don’t feel like you have to let go of your coffee subscription! I didn’t). 

25% of $4,000 (your monthly net income) = $1,000. Set up a monthly $1,000 automatic transfer from “bills” to “savings” (or bi-monthly at $500, or whatever balance you want depending on when your bills come out. Mine tend to be front-loaded so the bulk of that savings transfer takes place on my second paycheck). 

What’s left to spend?! $4,000 – $2,400 (monthly bill obligations) – $1,000 (automatic transfer to savings) = $600! Now, set up an automatic transfer for $600/mo to that “spending” account. I recommend a different institution so that you have a separate debit card. 

Let’s do the math…

  1. $4,000 comes in
  2. $2,400 goes out (bills)
  3. $1,000 auto transfer to savings
  4. $600 auto transfer to spending
  5. Boom! That’s $4,000. 
  6. Check your math $600 = 15% of $4,000
  7. $1,000 is 25% of $4,000
  8. $2,400 is 60% of $4,000

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It’s a good rule of thumb to have 3-6 months of net income saved up for emergencies. Once you have that, start tackling high-interest debt, or any debt. Once that debt is gone, start contributing more to that 401k, or open up a Roth IRA. Put some money into a savings account for a car, a wedding, a house! The possibilities are endless! Remember, I’m just a late-twenties account manager with an undergraduate degree in finance so be sure to consult a Certified Financial Professional with any concerns you may have!

Things to Keep in Mind

  1. This is a frustrating process, and you won’t get it right the first time.
  2. You will need to adjust as things happen, consider raises, a rent increase, buying a house, having a kid, etc.
  3. Everyone’s situation is different, you may need to account for debt, you may want to set up a different set of accounts, and so on.
  4. Math is hard.
  5. Sometimes you can’t afford to save much, and that’s okay. Don’t be intimidated by those percentages, just be aware of them, and work towards them. (Maybe not the 60% bills part LOL! I’d like 0% bills, please.) 
  6. Please, please take advantage of your employer’s 401k plan! As I said, it is FREE money.
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