Today’s article is a guest post from Ryan, a native of Wisconsin and current NYC’er. He works full-time at an advertising agency and started MortgageWiki for fun during the Coronavirus epidemic.

A lot of people feel overwhelmed when they think about the question of how to set a budget – and in most cases they avoid it. Today we break down the process into a few simple steps to help make it much easier to manage and less overwhelming.

Step 1: Estimate your new budget

If you are a pen-and-paper sort of person, then get a fresh new notebook and open the first page. Some people like to budget in a spreadsheet on a computer, which makes adjustments a lot easier moving forward.

Other budgeting tools include:

• Mobile apps 
• Budgeting calculators
• Monthly expenses questionnaires online 
• YoungMoneyFinance Guides!

Step 2: Assess where you spend money each month

What spending accounts do you use for your regular expenses: a checking account, credit card or Venmo account? Get the recent statements or log in online so you can look over your last few monthly statements to help you remember regular expenses.

You should also account for unexpected-yet-expected expenses.

• Are you planning to move soon?
• Will you have to take care of elderly parents?
• Are you planning on buying a car?
• Do you have to pay taxes?

Step 3: What are your monthly expenses?

Write ‘em all down, starting with the big ones – monthly rent or a home mortgage loan.

Move to the next category of high expenses (like student loan payments) and work your way down.  Always start with the things you must pay.  Think also about your annual “must pay” expenses – property taxes, annual fees, anything with big annual checks. 

Step 4: What are your non-essential expenses?

The cuts are the hardest part of the budget because no one wants to really look them in the face! However, it’s important to write non-essential spending down so you can see where your money is really going and where you might have to cut. Think about your eating out expenses, beauty treatments, shopping habits, weekend parties, entertainment, etc. This includes the amount you spend annually on travel or family vacations.

After you have jotted these down, scan your account statements for the last few months and see if you were realistic about how much you are spending in these areas. Spending on the “nice-to-haves” is fine if you budget appropriately.

Step 5: Set your savings goals

At this point in the budget, you should determine the amount you’ll need to save every month. The one caveat is to have enough in your savings for emergencies (or an “emergency fund”). It should be equal to at least 3-mo of expenses or more (6-mo, if possible). Even if you have credit card debt you’re paying down, start by saving $1,000 into an emergency fund – to prevent you from adding to that credit card bill in an emergency.

Also, your retirement savings should also be a part of your budget; shoot for at least 10% of your income to long-term savings as a rule of thumb. If you have goal-based savings, like saving for graduate school or a car, list those items as well.

Step 6: Tackle Debt

If you have any high-interest debt in the form of credit cards or personal loans, you can put a pay-off plan into place. This is money above the minimum payment that you are going to put towards these loans to pay them off faster. That high interest rate is expensive and is a bad hit to your credit score.  (This does not apply to the typical mortgage, car loan or student loan). If you think you can get a plan to consolidate your debt and bring down the interest rate, it’s another option to consider.

You should also create a list of all your income sources. This should include your primary income from work. But also think about other income streams you may have or could have. You need to think about where income can come from to support this plan.

• Can you work some extra hours?
• Could you pick up some freelance work?
• Or local jobs such as food delivery?

You should also account for “Total Income” and subtract “Total Expenses”.

Are you ahead or behind?  Can you achieve these savings amounts, and still have more to save at the end of the year? If yes, nice job! Most people are not in this position.

Step 7: Talk Honestly About Making Changes

Can you cut some luxury expenditures? Can you bring in an additional income stream? If you have a partner with whom you share finances, now is the time to talk honestly with each other about the changes you can make on all sides. Then make a new column on your notebook or spreadsheet with your new budget.

Don’t get emotional about it: Even if one person is overspending, do not start with anger or judgment – it will only create defensiveness. If you know you are going to have to ask for help with your budget or income from your parents or another person, do not get emotional or demanding, just start out calm and open.

Start the conversation with, “I’ve been working out how to budget my money and I would like to talk with you about it and the help I need from you to make the budget work.”

Be open and honest and transparent:  Be clear and specific on all the items.  And remember to be open to their feedback.  Ask them – do you think I forgot anything important? Do you think we underestimated or overestimated anything? You can be a role model for the kind of conversation you want to have by listening, taking the feedback calmly, and taking notes.

The hardest part is making some specific agreements: The process is give-and-take so be willing to do both – give and take. Once you have made some decisions, write them down with clear specific numbers.

Example: Should you keep the grocery bill under $x every month. Or should we keep new clothes and shoes shopping to under $x this year?

Ask for support: Then turn the conversation by asking, “Based on this budget, what do you think you could do to help?” Leave the question open first. Your partner might have ideas you have not thought of yet. Then start to add in your specific requests.

Try not to make the process judgmental, but rather say “Do you think you could change X to Y?”  Make the requests clear and specific.

For some, working through the details of the budget with another person can be really challenging. An alternate approach for how to budget your money is to set a discretionary amount per person that cannot be exceeded. Each person should manage their discretionary funds individually. Some couples even put this monthly discretionary amount into separate accounts or load it on a prepaid card to keep it simple to track.

We hope these steps help you create a budget that works for you! Make sure you leave room for some fun; sticking to a bare-bones budget without any room for fun activities or things you love is much more difficult.