Rather watch the video version?  You got it!
In Part 1 of this mini-course . “What’s a Budget?,” we talked about what a budget was and I had you create an outline of your budget categories and line items.  In Part 2, we talked about the fact that past and future budgets are two different things and I had you create a past budget.  Here are links to those two parts in case you missed them.  (You will find both a blog and a video version of each)

What’s a Budget – Part 1 – CLICK HERE

What’s a Budget? Part 2  – CLICK HERE

In this last part of the mini course, Part 3, we are going to

  • talk about balancing the money that comes in and money that goes out
  • discuss best practices for balancing your spending between mandatory (must haves), discretionary (like to haves) saving/debt management (long term goals) line items
  • create your future budget
  • give you the next steps for you to follow as you continue to refine your budget.

Clearly, it’s going to be a busy week but when you are done, you will have created a budget for yourself that you should be able to comfortably live with.  Like last week, you may do better watching the video version…I’m going to cover a lot of ground and I point out some of the nuances in the video that it’s hard to do in a blog.

Balancing the money that comes in and money that goes out.

“We need to balance the budget.”  That’s a term you may hear frequently about government spending.  What they basically are saying is, “we need to make sure what we don’t spend any more money than the money that comes into the government from all the taxes everybody pays.”  It usually is followed up with a discussion on all the difficult decisions law makers have to make on what stays in the budget and what needs to get cut.  They don’t stop until they are done.

The process should be the same in your life.

If you spend more than what comes in, you have to use credit to make it all work.  Credit, as in loans and credit cards.  That means you end up paying for things later, you know, when you start making more than you spend (when does THAT happen?), and you pay someone (sometimes a hefty amount) for the privilege of using their money (interest).  Credit has its place in your life and in your budget.  You just want to make sure that it stays INSIDE your budget and you have a plan to pay it off.

Let’s go back and look at the Past and Future Budget Worksheet from last week’s Part 2 of our course.  This pdf worksheet does the math calculations for you so it’s super handy. (If you need a copy, CLICK HERE for a free download).

Below is the summary page for the example we used in Part 2.

In our example we had income of $59,800 and we spent $65,228.  That means we overspent by $5,428.

The interesting thing is that at first glance we paid off debt of $17,388 and saved $8,320.  If we are looking at our spending without comparing it to our income, we’d be pretty happy.  But if we had to borrow $5,428 to make that happen, we didn’t do as well as we thought.

This is what the vicious cycle of using credit to keep the budget balanced looks like, and it can be very deceptive.  The way you see this scenario play out, is that you make payments on your credit cards, but as fast as you pay them, you charge more to meet your spending needs.  Does that sound familiar?

There are two ways out of this dilemma.  Make more money or spend less.  Simple, but true.  Let’s figure out how to do that.

Are you overspending or underspending – Look at your Budget Summary? 

Are you over spending or underspending (or balanced?)

If you are balanced, you are on track.

If you are underspending, that is money that is ending up in a savings or cash account.  That’s great news.  Just make sure you are maximizing its value so it’s working for you as hard as it can.

If you are overspent, we have some work to do.  As we create your future budget, our goal is to get that “Money Left over or (over spent)” line to $0.

Get started with your future budget

No matter if you are overspending, underspending or balanced, the next step is to create your future budget.

In Part 2, we created a snapshot of your past budget.  As we talked about last week, this is a great place to start working on your future budget. As we go through the budget worksheet and start filling in the future budget column on each page we are going to use your past budget info as a guide.

I’m going to use the Past and Future Budget Worksheet we filled out in Part 2 for this example, but you can easily do this on a blank piece of paper as well.


First, go to the income page and in the future column, put in what you think your future income will be.   Will you be in the same job?  Expecting a raise? Getting a new job?  Getting a side job?

In our example, I’m going to assume I’m getting a 10% raise (heck, I’m doing an outstanding job at work!)  You may need to use a calculator to do some of the math here.  To add 10%, my formula is $52,000 * 1.10 = $57,200.   (notice a 10% increase uses the number 1.10 in the formula.  20% would be 1.20.  5% would be 1.05. You get the drift…)

I got a raise, so that means the amount I’m contributing to my 401k and the amount my company matches will go up as well by the same multiplier.   The formula for my 401k is 5,200 * 1.10 = $5,720.  The company match goes up the same way $2,600 * 1.10 = $2,850.

Last year my, total earnings were $59,800 and this year it will be $65,780.  I got a $5,980 raise.  Which is good because it hopefully means I have some money to fix my overspending problem from last year.  (This goes back to the 2 ways to fix the overspending dilemma “make more or spend less”)  Let’s see what else is going on.

Mandatory Spending

 Next I want you to update your mandatory spending.

Take a look at the way I’m made assumptions.  Most of my expenses aren’t going to change much if any.  My mortgage is the same.  My phone is on a 2 year plan so it won’t change.  I know I’m going to need to fix my back stairs to my house in the next year, so I AM going to increase my house repair bill for that.

My mandatory spending went from $26,900 to $28,750 which is an increase of $1,850 (including that one-time stair repair)

Discretionary Spending

Next is discretionary spending.

I know I spent more money than I made last year, so I’m going to try and keep my spending the same and see if my budget works for this first round. (Note: doing your budget can take several rounds of tweaking until you get to your final balanced budget.  That is completely normal.)   Hopefully my pay increase will do the trick.   My sister is getting married next year though, so I’m going to add a line item for that.

She’s going to get married and I’m going to spend something on the wedding, so I need to but it in the budget.  If I don’t, I’ll end up spending the money anyway and beating myself up because it wasn’t in my budget.  Put it in.  See what happens.  Then make choices you can live with.

My discretionary spending went from $12,620 to $13,120 which is an increase of $500.

Debt Management

Debt management is next.

Everything will stay the same for now.  All my debt commitments remain in place.

My debt management spending stayed at $17,388.


The only thing I’m going to change for now is the 401k and Company match which comes from the income page above.  My new 401k will be $5,720 and my new match will be $2,860.

My savings spending went from $8,320 to $9,100 which was an increase of $780.

Now we have put all the numbers in our first version of our future budget.  We created this budget by building it line by line, from last year’s actual spending.  It’s called a “bottoms up” budget.  This is a great way to build a budget because you control all the pieces yet limit the overall spending to the amount of money that comes in.

Let’s go back and take a look at what the Budget Summary looks like now.


The Budget Summary

Sigh.  Even with that nice new raise, it still looks like I’m spending more than what is coming in.  What do I do next?

We aren’t going to jump back into the line items and start cutting our spending.  Not yet anyway.

I want to take a look at the balance of spending between each of the categories.  There should be a balance.  Let’s see how balanced my budget is for where I am in my life, then I’ll have a pretty good idea where I need to make some changes.

Balancing the spending

Applying some simple percentages to each of your spending categories is a great way to make sure you are on track. There are the three spending categories, Mandatory (“must have”), Discretionary (“like to have”) and Savings/Debt Management.

I know you are dying to get your future budget set up and be done.  But before we jump to that step, I want to talk about balancing your budget over time.  You need to know where you are in your life cycle to know how to plan the right balance for today’s budget.   For example, your budget assumptions today will not be the same when you get close to retirement and they won’t be the same as when you are in retirement.

Let’s break down the life cycle and how to think about it.

I’ve heard other finance experts talk about certain formulas you should use.  You may have heard “save 15% for retirement”, or “spend 15% on your car”, or use the “50-20-30” rule.  The problem with these magical formulas is they are too simplistic.

It doesn’t take into account where you are in your life cycle.   Depending on where you are in your life, you are going to spend your money differently, so you need to account for that.

Let me break that down for you so you understand why a one size formula doesn’t fit everyone all the time.

Let’s use the 50-20-30 formula as an example.   I’m going to use a sample income of $100,000 just to make the numbers easy.  In the 50-20-30 formula you are suppose to use

  • 50% if your budget for mandatory spending,
  • 20% for discretionary spending
  • 30% for savings/debt management.
Example of 50-20-30 Formula
This looks pretty good, right, nice and balanced?  Maybe, maybe not.  If you are in the period of your life when you have kids and daycare, you may need every penny you have every week and there is no way you can direct $30,000 a year to savings and paying off debt.  This formula just isn’t going to work.  You can try and make it work, but if you don’t have a realistic plan, it’s not going to work and you aren’t going to stick with it.

Let me show you the other problem with this formula.  Let’s fast forward 30 years and you are now making twice the money you did before (who doesn’t love a raise or promotion), so let’s say $200,000, just to continue to keep the numbers simple.

This is what the breakdown would look like using the 50-20-30 formula.

50-20-30 Formula in 30 Years
Now that looks like a really comfortable place to be, right?  Lot’s of room to buy everything you could possibly want and still saving a good hunk of change.

But let’s look at that a little more deeply.

Hopefully 30 years later, you have paid off your mortgage (which is in your Mandatory number) and your life has simplified because the kids are gone, maybe you’ve downsized, or you just like a simpler life.

If you follow the formula rule, you will find a way to spend that $100,000 in your Mandatory budget, because that’s just what we do.   Yes, you can afford it, but what happens when you want to retire?  Your numbers will look like this if you continue living that current lifestyle in retirement.  You won’t be saving anymore, and you will need to cover your mandatory and discretionary budgets.

50-20-30 Formula in Retirement
$140,000 a year could feel like a lot to come up with in retirement to cover your bills each year.

Yes, as you earn more, you should feel comfortable spending more. You also want to make sure that as you plan your life, you are leading to the life you are comfortable living in retirement.   The day you retire is not going to be the day to make drastic changes.  You do way better to have a long-term plan that helps you with that transition as you go.

My FAST Money Management budgeting formula.

When I designed the FAST Money Management System, I wanted to create a system that anticipates that your budget will shift over time.   Not only will it shift over time, but as you make more,  you need to make sure you create a balance between spending and saving more.  I think of it as the ultimate plan to live within your means.   If we do it correctly, we will set up a life style that is sustainable for the rest of our lives.

Let me show you a summary of how I think those percentages need to shift over time.

Keep in mind that these are recommendations.  Depending on where you are in your process, where you live (cost of living can vary dramatically), and your age, you may need to tweak them.  The goal is to have a plan that moves you in the right direction.

Interesting to note that I agree with the 50-20-30 for your prime earning years.

The FAST Money Management System Formula
See the shift over time?  Notice that the mandatory spending goes down over time (until retirement) .  The discretionary never goes above 20% before retirement, and the savings rate goes up over time.  Let’s use the previous example and put in some numbers.
The FAST  Formula With Numbers
This is what happens with this plan

  1. This reflects the fact that if you are just starting out (or just starting to get your budget under control) you maximize your mandatory spending, keep a lid on your discretionary spending, and make reasonable progress on your debt and savings.
  2. In your prime earning years your mandatory spending consistently goes up over time but you don’t increase your spending as fast as you make more money
  3. The money you don’t pour into mandatory spending goes to debt and savings so you owe less and save more
  4. As you get close to retirement your mandatory spending goes down which allows you to save even more money while getting yourself ready for life in retirement.
  5. When you get to retirement, you have significantly less in your mandatory budget that you need to figure out how to pay for and a very healthy discretionary budget that gives you flexibility. Oh, and since you have been saving more, you have MUCH more set aside to make sure your retirement is absolutely perfect.

This is the definition of living within your means.  Following this strategy means you continue to enjoy spending more as you make more, but you don’t spend more than you can afford.  It also sets you up to have the money you need for a comfortable retirement, enjoying the lifestyle you had before your retired.

That is a total win.

Just keep in mind that this is guidance.  Things that could effect the formula that is right for you could be where you are in your savings plan, your level of debt, your age when you started a family and your risk tolerance in the stock market.  We dig into these factors in a much deeper level in the FAST Money Management class.

Back to YOUR budget

That, my friends, was a lot to consume.

For you in this mini-course, I’d like you to think about where you are in your life cycle and what you think your percentages should be for the coming year.    Write down these three questions and answer them for yourself.

I’m currently at this point in my life cycle : ____________________

I’d like to retire in ______ years

My percentages should be:

Mandatory:              ________

Discretionary:          ________

Savings/debt:           ________

Next we are going to compare where your percentages are in your budget to where you would like them to be.  Then we will see how those percentages turn into numbers you can plan towards.

I’m create a worksheet to help you with this step.  This worksheet will let you put in your income for the year and the percentages you think you should be at, and it will tell you how much you should be spending in each category.   You can use this to play around a bit and help you figure out where you need to adjust.  CLICK HERE for the link.

Breaking Down Your Budget

Here is an example of how I filled it out for my budget.

From my Budget Summary I entered my future income of $65,780 in Planned Income.

I’m in my prime earning years so, from the chart above, I put in the percentages for each category, Mandatory 50%, Discretionary 20% and Savings/Debt 30%.  The worksheet then tells me how much money I should be spending in each category.

Now I’m in a position to see how my current Future Budget is shaping up to help me reach my goals.

I’m going to compare my numbers from the Breaking Down Your Budget Worksheet and my Future Budget on my Budget Summary Worksheet.
Remember I have two goals.  First is getting my money left over or (over spent) money to $0 and second is getting my percentages in line with my point in my life cycle.

My mandatory goal is 50% and my future budget is 42%.  That’s great!

My discretionary goal is 20% and my future budget is 19%.  That’s great as well.

My debt/saving goal is 30% and my commitments are 39%.  Here’s my problem.  I now know my debt is too high for the amount of income I am bringing in.

The challenge is that I may or may not be able to bring that debt commitment down.  There are two things I need to do.  I can try and get my minimum debt/savings commitments reduced.  Or I can cut out some of my mandatory and discretionary spending to offset the amount of debt I have to pay.   I can also trim back my savings a bit to make it work, but I’ll try hard and leave that alone.  There are lots of things you can do to work particular line items in your budget, once you know where you need to work them and what your goals are.

Either way, I know I need to figure out a way to get some of that debt paid off.   I can now see that the debt I’m carrying is taking away from the amount I should have to spend on mandatory things…that may be why my daily spending is feeling tight.

Back on my Budget Balance Worksheet I’m going to leave my debt at 39% and take a little bit from both mandatory and discretionary spending to make my budget balance.  I can now see how many dollars I have to spend in each .

Now I can go back to my Past and Future Budget Worksheet and I can start to play with those future numbers on each page until my percentages and dollars get to where I want and need them to be.

 And folks….when you get to this point, you have your Future Budget!  Well done!

What to do if your income varies?

Some people have incomes that can vary dramatically during the year.  Maybe you work for yourself, have a flexible schedule, see lots of seasonality, or have overtime that changes.

If this is you, you need to do your future budget twice.   The first version, you should base on the lowest income you think you might see.  Make the budget balance.

The second version, should be at a higher income, though one that you also think is reasonable.  Make that budget balance as well.

As you live your life, manage your money to the lower of the two budgets.  When more money comes in, you know exactly how you will spend it by looking at the second budget.

I’ve had my own business for 8 years now.  I live with this scenario, so I know how stressful it can be.  Having two budgets takes a lot of the stress away.  It also helps me keep my spending on track.  When you have an income that varies dramatically, it’s very easy to overspend when the money is flowing.  Having a budget, where I decided how I want to spend my money, helps me spend that extra money in a smart way.

 What happens next?

Over time, your budget should and will shift.  You should create a budget for yourself every year.  In my house, I do it the first week of the New Year.  It’s usually a quiet time, I’m full of New Year resolution to get things done, and I have a 12 months of the last year’s past budget numbers available to create my future budget.

At that point in time, I think about where I am in my life cycle and what are the appropriate percentages for me.  To be honest, I play with it.  If the goal is about living today and getting to retirement on my terms, I’ll play with my budgets to see what I have to do to retire at 60, 65 and 70.   That really gets me thinking about the decisions I want to make for the next year.

Learn more about debt management, budget tips and strategies, retirement and investing in the future

What do you do now that you have a budget (or you can’t make your budget work)?  There are several things you should do.

Make this a regular thing

You should create a budget for yourself every year.  In my house, I do it the first week of the New Year.  It’s usually a quiet time, I’m full of New Year resolution to get things done, and I have a 12 months of the last year’s past budget numbers available to create my future budget.

At that point in time, I think about where I am in my life cycle and what are the appropriate percentages for me.  To be honest, I play with it.  If the goal is about living today and getting to retirement on my terms, I’ll play with my budgets to see what I have to do to retire at 60, 65 and 70.   That really gets me thinking about the decisions I want to make for the next year.

Make this exercise of looking at your past budget and tweaking your future budget, a regular thing.  As you get started, try doing it every month or so until you feel comfortable with it.  Do It the same time you pay your rent or mortgage.   That way you will make it part of your process and you won’t forget.  Once you are comfortable, you can pull back to own every quarter, then twice a year, and finally once a year.

Break the budget into smaller pieces

Break down your budget into months or paychecks so you can give yourself some goals on spending.   As you continue to track in Mint.com, you will be able to monitor your spending any time of the day or week.  This would be the time to go and play with the budget part of Mint.com where you can put in the monthly budget you set for your self and measure yourself as you go.

Continue to look for ways to learn more. 

There are tons of resources, including mine, which give you tips and strategies for making the most of your money.  You now have a framework and a budget so that you know where you want/need to work.

We covered a lot in Part 3 – Watch the video version

You may want to check out the video version of this mini-course.  I’m able to cover more and show you examples in the video that I can do in a blog.  CLICK HERE to see the video.

Take my class

Budgeting is just part of personal finance.  I think most people with budgeting because it seems to be the most obvious thing and it’s something that touches our lives pretty much every day.

The five pieces of personal finance are budgeting, debt management, saving, investing and retirement planning.  I created the FAST Money Management System, to teach you have the five pieces work and to teach you have they work together because working on one part is not enough. .

6 Steps to Master Your Money and Create a Plan That Gives You Financial Freedom
In my class “6 Steps to Mastering Your Money and Creating a Path to Financial Freedom.”  I teach you hove the five pieces work and I show you how to create a financial plan that makes sure you never run out of money.  When you are done with the course, not only will you understand how it all works, but you will also have a one-page financial plan that captures where you are, where you want to go and what you have to do to get there.  This mini-course is a great first start.  You need to do the rest as well. If you’d like more information, please check out my FAST Money Management course by CLICKING HERE.

As always, if you get stuck with any material in this class, please feel free to reach out to me at Linda@RealFamilyFinance.com  or come join my private Facebook Group where we talk about all things personal finance.  I’m there every day so you can ask me questions there as well.  You can find the group by CLICKING HERE.

1 Comment

  1. Linda Hannon

    I’m somewhere between prime earning years and before retirement. Wow…how did I get here?