Budgeting can be a drag. You don’t get to spend as much as you’d like on the things you want, and yet you still worry about whether there’s enough left over for essentials like saving and debt payments.
But it doesn’t have to be that way. I’m going to introduce you to the one-number budget, which flips budgeting on its head and frees you to set aside money for your day-to-day spending. You’ll also find below my customizable one-number budget spreadsheet.
So let’s dive in.
Why Budget?
Your wealth, regardless of how much or how little you have, should create opportunity and help you achieve your life goals. But instead we often feel trapped by an endless stream of monthly bills and unexpected expenses.
A budget is a plan for your spending. Done right, budgeting will help align your everyday money decisions with your goals, ensuring you’re moving in the right direction. You’re in control, making thoughtful decisions about how to balance today’s needs and wants with tomorrow’s hopes and dreams.
With budgeting comes awareness around your finances. You’ll know whether you’re trending in the right (or wrong) direction and can adjust your spending or saving accordingly. The knowledge that you’re making progress — even a little — can provide that much-needed motivation to stick with your plan.
The right budget also relieves stress and creates freedom around money. I often watch clients breathe a sigh of relief after we’ve created a budget and eliminated the guessing of “how much can I afford to spend?” There's peace of mind and confidence that comes from knowing exactly how much you get to spend, save, and give in each area of your budget.
Misconceptions about Budgeting
I don’t make enough money to budget. There’s hardly anything left at the end of the month.
All the more reason to budget. When your means are limited, it’s even more important to ensure you’re effectively managing what you do have. Budgeting will also help you:
Avoid overspending
Avoid and manage credit card debt
Have more money available for what matters most to you, and
Prepare for large annual expenses like travel, tax bills medical bills, or holiday shopping
Just because you make less now doesn’t mean you always will. Be prepared. If you are wise about managing what you have now, then you will be prepared to manage a larger income and to spend, save, and invest in what matters most to you.
I make plenty of money and always have a lot left over at the end of the month. Why budget?
It’s high-income professionals who I most often see overspending in ways that are out of line with their priorities and goals — and they don’t realize it because they don’t budget. Having a budget helps you:
Take control of your finances. High-income professionals often tell me they don’t feel good about how they spend their money, even when there’s plenty left over. The reason for the guilt and stress is because of the unknown: they don’t know whether they’re overspending and whether they’re saving enough for goals like a down payment, college, or retirement. A budget tackles the unknown and gives you control over your finances and goals.
Prepare for life changes. The most common mistake I see with high-income professionals is failing to prepare for future seasons of life when expenses will increase and income will drop — maintaining a home, having children, supporting a stay-at-home spouse, a job or career change, an economic downturn. Budgeting now helps you understand how much you need to afford your lifestyle and where you can be flexible should income or expenses change in the future.
I don’t have the time! I’m not a details person. I’ll never stick to it … and other common pushbacks.
Making and maintaining a budget does not have to be a time-intensive or burdensome process. You’ll spend some time at the beginning of the year planning, and there’s flexibility going forward for how you track and use the budget. Plus, with the one-number budgeting method I’ll walk you through, budgeting can be as easy as tracking one number each month. In my experience, virtually everyone who takes the step of committing to a budget feels empowered by the sense of control and clarity the process provides.
How the One-Number Budget Works
Now we’ll walk through the one-number budget. Grab our free spreadsheet here and follow along. We’ll also send you a tutorial video to clear up any questions about how to use the spreadsheet. (If you already receive our emails, check out the June 2018 Fiscal Therapy newsletter for the new budget spreadsheet.)
Start with your take-home pay, and first take out your financial responsibilities — saving, debt payments, and giving. These categories always have first dibs on your money.
Second, take out your large annual spending, like travel, insurance premiums, home maintenance or furniture, out-of-pocket medical expenses, tuition, and gifts. These categories are infrequent and often happen in one large lump sum during the year.
Third, take out your fixed monthly spending, like rent, your cell phone plan, utilities, subscriptions, and your gym membership.
What’s left is your “one number” for day-to-day expenses. This one number is what’s available each month for expenses such as groceries, restaurants, clothes, entertainment, and the nail salon. It’s a mix of necessities and luxuries.
Why is the one-number budget so effective? First of all, it keeps things simple. With a little advanced planning, there’s only one number you’ll need to focus on as you monitor your daily spending.
It also brings freedom to your spending by taking out guess work. If you plan ahead on your financial responsibilities and your large annual and fixed monthly spending, you’ll know exactly how much you get to spend on day-to-day living.
And third, it’s flexible. The balance of needs and wants will change month to month, and focusing on one number (rather than a detailed $50 here and there for specific categories) gives you the flexibility to direct money where it’s needed most each month. You have friends in town in May so you spend more eating out and seeing shows, but in June you spend less in those areas but more on groceries because you’re hosting a couple parties.
The one-number budget also gets you thinking about your financial priorities in the right order. Saving, debt payments, and giving always come first. If that doesn’t leave enough room for your gym membership or Starbucks, then some expenses have to go.
Common Budgeting Questions
How much should I be saving?
Your ability to save depends on a variety of factors, but a good goal is to work toward saving 15-20% of your net income. Parents with young kids and high childcare costs will often save less than 15%, while dual income couples with no kids will often save more than 20%.
How do I know how much to budget for each spending category?
Start by adding what you know, such as debt payments, rent, and other fixed monthly expenses. Next, look at your past spending and consider what’s realistic. For large annual spending, look over the last 12 months so you don’t miss anything. Then review your last few months of bank and credit card statements for any fixed bills and for an average of your day-to-day spending categories (like eating out and groceries). Once you’ve taken a first pass through the spreadsheet, you’ll likely need to play with some numbers — decreasing some categories, increasing others — so the numbers work.
My “one number” is negative — help!
If your “one number” is negative (or just too small for your day-to-day spending), it means your planned financial responsibilities, large annual spending, and fixed monthly spending are too large for your income. Try these steps:
First, look at your fixed monthly spending and see where you can cut back, like canceling cable, downgrading to a different gym, or canceling a few magazine subscriptions.
Second, look at your large annual spending and see where you can cut back, like taking a less expensive vacation.
Third, if the numbers still aren’t working, it may be your savings rate or your giving is too aggressive for this season of life. Decrease those if necessary, but know that those changes don’t have to be for forever.
Finally, consider the hard questions, like whether you need to move to a different neighborhood to reduce your rent, downsize to a smaller house, or switch your kids out of expensive daycare or private school. You don’t necessarily need to make these changes, but everything should be on the table as you work out how to balance your budget.
What about taxes when I calculate my income?
We use take-home pay (which typically is post-tax) because that’s the actual money that’s hitting your bank account. Just be sure you’re not under-withholding taxes from your paycheck. (Check out our article on tax withholdings.) If you’re over-withholding taxes, then you’ll have a refund come tax season — a little bit of forced savings! If taxes are not withheld from your income, make sure you set aside savings for taxes from every paycheck. The amount you need to save will vary widely based on your income, family situation, and where you live, but a range of 15-30% is a good starting point for most people. Ask your tax accountant for a more accurate estimate.
A note to high-income earners: If your gross income is more than about $128k, your paychecks at the end of the year will be larger because you max out your Social Security tax before December 31. Social Security tax only applies to income up to $128,400 (6.2%), so once your gross income hits $128,400 for the year (for maximum tax of $7,960.80) you’ll see this tax fall off your pay stub until the next tax year. Tip: if you’ve already maxed out Social Security for the year, subtract $663 from your net income to more accurately approximate your average monthly income.
How do I budget for my bonus?
Annual bonus: Don’t include it. Create a mini budget for this income that is hopefully largely focused on savings or a few well-planned expenses such as a future vacation. Don’t spend this money (or commit to spending this money) before it hits the bank.
Quarterly Bonus/Commission: Ideally, treat this the same as an annual bonus, making a separate mini budget for extra savings or well-planned future expenses. However, if that’s just not your reality right now and you need to factor that income into this spreadsheet, then do so. Make a conservative annual estimate for all after-tax bonus/commission income, divide by 12, and enter that income in your spreadsheet. And again, the ideal situation is today’s bonus pays for tomorrow’s expenses.
What if my income is variable?
Budgeting when your income is unpredictable is a unique challenge, but it can be done. It is all the more important that you plan for your expenses and keep track of spending when your income is variable from month to month. I recommend faking a steady income by paying yourself out of a savings account. This method takes some of the emotion and guessing out of your month-to-month income and spending. It also holds you accountable to steady lifestyle spending.
Here’s how faking an income works. All streams of income are deposited into one savings account. You set up an automatic transfer for the beginning of each month from the savings account that collects your income into your checking account. You might receive $10k of income in April, $2k in May, $6k in June, but each month you pay yourself $6k like a steady paycheck.
Ready to go deeper? Check out our top financial planning resources here.