Developing a budget is a crucial first step on your road to financial wealth.  The goal is not only to figure out where you’re money is going, but maybe even more importantly what you can afford to save.  If I ask you today, without a budget, can you put away $1000 a month? More?  Less?  You really don’t have a good idea.  At the same time, a budget enforces that your money should be allocated in a way you consciously decide, not just spent until the wallet is empty.  There are a number of personal finance software packages out there to get you started, but I’ve generally found them more of an obstacle than a help.  Personally, a spreadsheet has always done the trick for me.

The first thing you need to do is come up with your spending categories.  Many of these are easy: food, housing, etc but some may be particular for you.  There’s a funny Office episode where Michael is questioned for his money spent on magic sets.  Hey, no judgement.  If it’s important to you and within your budget, go for it.  Magic aside, here an example monthly budget for a person with a yearly salary of $72,000

Let’s look at a few of these. Some expenses can be tricky.  I know you probably aren’t going on $300 vacations every month, the idea is to set aside money in your budget so when you want to take that vacation, the money has been saved.  Other expenses like things for your home might have occasional big purchases and some months where you need to spend nothing.   Again, this is just an average so you are ready to replace that washing machine when it craps out.  For the car, I know loans are common, but I really can’t stand borrowing money for a depreciating asset.   It’s a double whammy. I understand you usually need a car to work and sometimes a car loan is unavoidable, but try to avoid it if you can.  Instead, think of some of this money as saving for the car you pay for with cash.  I also have a category here called mad money and I that needs some explaining.  My wife and I set up three bank accounts. One joint, one that’s hers, one that’s mine.  Most bills are paid from the joint account and each month our “mad money” is transferred from the joint account into our personal accounts. Our rule is we aren’t allowed to question each other on what we spend from our personal accounts.  It has really protected me from being ridiculous and headed off at least 1000 potential disagreements.

Estimating your after tax income is not very difficult especially if you are using the standard deduction.  See here for an example.

Once you have your food, car, magic, and whatever other categories for your situation you need to estimate your monthly expenses in each category.  You can do this by tracking your actual expenses for a while, bu don’t be afraid to challenge yourself.  If your spend $500 at the bar every month you’re reaction shouldn’t be “well I guess that’s my bar budget”.  It should be…”holy crap, I’m literally drinking away my future!” The example budget I show above leaves room for fun, in addition to saving almost 15% of the pretax income.

Hopefully when you figure out your budget the monthly income exceeds the total monthly expenses and you can plug in a significant amount for savings.  If not, you have to make some cuts. I know it’s painful, but saving for your future is just as important as food and shelter.  It’s literally your future food, shelter, and medical care. If that means a few less nights out, that seems like a small thing to ask.  Future You says thanks, by the way.