Chapter 5: Create a Realistic Budget

Without a realistic budget, you won’t be able to follow it (and that will do nothing to help you reach financial independence)


To create a realistic budget that is practical and easy to follow, you’ll need to figure out where all of your money is going, which is what we will be doing in this chapter.

The first step is to make a list of all of your bills and expenses and group them into categories.

Then, sum up all the expenditures, even if you believe they are minor because they will impact the overall total.

The little expenses accumulate over time, and before you know it, they may take precedence over your budget.

This stage might be more difficult than the previous one of listing your income because you will undoubtedly have many more expenditures than income sources.

After you’ve completed the items above, you’ll want to continue on and make a plan for your expenses.

This is likely to be a time-consuming process.

While recording your expenditures, it’s critical that you’re meticulous and deliberate.

Cutting corners to try and make the money going out to look like it is less will create a pitfall in your budget and set you up for failure before you even get started.

This chapter will provide you with some pointers and information that will make managing your expenses less stressful and straightforward.

If you follow it, financial independence is on its way to you!

Let’s take a deep dive into creating your budget!

What are you spending each month?

clipboard on table with coffee and calculator writing says my realistic budget in pink writing

Now that you’ve figured out how much money you make every month, it’s time to figure out your monthly costs and place them in different categories.

Sorting your expenses into categories will assist you in determining which expenditures can be reduced later on, if necessary.

It’s critical to do this step no matter how difficult or tedious the procedure is, or how frustrated you become while doing it.

You must ensure that you are not spending more money on a monthly basis than you are earning.

When you start making the list of your monthly expenses, the easiest method is to begin with the big-ticket items like rent or mortgage payments, car loans, and insurance premiums.

Then move on to smaller bills like electricity, cable television, internet service — basically anything that’s not included in the larger expenditures.

As mentioned numerous times, in order to create a realistic budget, it’s important to be as accurate as possible.

For this reason, it may be helpful to go over previous statements for each of your accounts and credit cards so you are aware of how much money is being taken out and where it is going.

If you don’t have any statements available, do some research on your own:

  • Scour your bank account for fees or unusual withdrawals (these could potentially indicate hidden costs)
  • Call up companies if necessary
  • Take notes on anything that seems too expensive or unnecessary

Once you’ve compiled this information, calculate the total you spend per month on all of your bills.

When you calculate the amount of money you are spending on expenses each month, you may be surprised by the final number you come up with.

The following steps will break this down for you and help you navigate the process in a simple format:

Figure out what you owe each month in debt

You must figure out how much you spend each month on debt.

This might cover things like:

  • automobile loans
  • title loans
  • credit card
  • student loans
  • personal loans

If you want to get yourself out of a bind and improve your financial position, this is something you need to do even if it is difficult (and if you have a lot of loans, it will be difficult.)

Remind yourself this is the best way to get on track towards reaching your financial goals and building a stress-free financial future.

Remember to include monthly insurance payments

It’s essential to ensure that your items are safeguarded in life, but it is also critical to ensure that you have the funding available to pay for this security.

You should include all of your monthly insurance expenditures when making your list of expenses.

If you pay your insurance quarterly (once every three months) or annually (once a year), divide the money you give to it by the correct number in order to calculate the monthly cost (as if you were making a monthly payment for it.)

The majority of people’s insurance policies are car insurance and homeowners insurance. However, if you rent your home you will also likely have renter’s insurance.

Other types of insurance people have that you shouldn’t forget:

  • Health insurance
  • Pet owner’s insurance

Calculate your monthly utility bills

Utility expenses must also be included in your list of expenses because that is money that goes out every month.

You may not be able to determine an exact number while doing this since your utility bills will vary from month to month, especially during the changing seasons.

You must first determine how much all of your utility costs were for the previous three months. The typical utility bills, depending on where you live, are

  • Electricity
  • Gas
  • Phone
  • Water

Figure out what you spend each month on groceries

We all need to eat, so we all have food expenses.

We also all know how costly groceries can be. Even generic-brand items appear to be getting more expensive every day.

It is critical that you include your monthly grocery costs in your budget when listing your expenditures.

Your monthly grocery costs will most certainly vary, so you won’t be able to get an exact number, but you can estimate based on previous months.

You may discover that you need to cut back on how much you are spending at the grocery store, switch to less expensive brands, or find creative ways to cut the amount you are spending.

Don’t forget special occasions

As you make your list of money you spend each month, don’t forget to include special events.

Birthdays and holidays, for example, can wreck a budget if they aren’t included.

If you aren’t sure what you have spent in the past, go back through your account statements and locate what you spent on gifts.

If you made purchases with other items, do your best to remember what you spent and calculate higher rather than lower if you are unsure.

Review previous cash withdrawals from your accounts

You need to make sure you include all of your cash withdrawals.

This can be a difficult part of the budgeting process because you took money out of your account but it may not be accounted for what it was spent on.

In this situation, do the best you can to list what the cash was used to purchase, knowing in the future this will be documented so you know exactly what every penny of your hard-earned money is spent on.

Set up your budget categories

Now that you know what you are spending your money on each month, for a realistic budget to come together categories have to be established.

Don’t go overboard and create too many categories. Remember from Chapter 1 this is a big reason people fail when they start a budget because it gets too complicated and creates more stress instead of decreasing it.

The most common categories in a personal budget are:

  • Housing and utilities
  • Vehicles and insurance
  • Food and dining out
  • Entertainment (including sports)
  • Clothing and Footwear (includes dry cleaning)
  • Healthcare Expenses (medical insurance premiums, copays, prescriptions)
  • Other necessities (child care expenses, pet care expenses)
  • Luxuries (new car purchase or lease payments, vacations)

Select the categories that fit into your life, and if there is a category you need not included in this general list, that’s ok!

Use the categories you need.

Remember, this is YOUR personal budget and it needs to work for you and no one else.

You did it! Your realistic budget is coming together!

You have completed two of the most important steps in creating a realistic budget: knowing your exact income and making a list of your exact expenses.

Remember, accuracy is vital in each of these areas if you are serious about creating a realistic budget you can follow.

What’s next?

What do you do if, after identifying your total monthly expenditures, you find that there isn’t enough money to cover all of them?

We will dive into this topic in the next chapter on how to balance your budget.

Let’s get started!

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