How great is Google Maps? Remember having to pull out a paper map from your glove compartment - or if you’re not that old yet, Map Quest - for directions? And remember how much it sucked when you missed a turn and had to improvise the rest of the directions? Think of Google Maps as your budget. Sticking with the analogy here: your car is you and your shotgun or your luggage in the trunk is all of your money. Wouldn’t you like to show up where you wanted to go with everyone and everything that you need? A lot like Google Maps, your financial destination is much easier if you can enjoy the drive and arrive safely with everything in toe.

OK, back to actually creating a budget. Of course, you can live your life and perhaps survive without ever creating a budget. But it helps a lot to set a framework for achieving your goals. And let’s be honest with each other, all goals require money but that is a topic for another article.

Before we dive in, I want to caveat that budgeting is not an exercise of cutting out the things you enjoy — it is actually the opposite. A budget keeps you honest by encouraging you to spend money on what you enjoy and not what you don’t. Furthermore, budgeting is also not about how much money you have or don’t have but allocating those dollars most appropriately for you.

Now that I have convinced you that you need a budget, let’s figure out how to create one as painlessly as possible using The Four C’s:

1. Collect

2. Categorize

3. Clarify

4. Check

Step one: collect

The best budgets were based on the most accurate information.

We’re looking for your spending habits over the past 12 months (or 6 months) – whatever would be the most accurate representation of your spending. Note: during COVID I spent far less on dining out and transportation than in a post-COVID world. Therefore, it is important to adjust for any unique circumstances (e.g. moving to a new city, etc.) The further back you can go can help to identify how you historically spend (i.e. identify what you ostensibly value) so that you can be aware of where those hard earned dollars are going to either adjust or confirm (we will do this in step three).

1. All credit card statements

2. Checking account statements

3. Venmo, PayPal or any other ways you spend money

It is much easier to track your spending if you do it all in one place (e.g. using just one or two credit or debit cards) and use physical cash only minimally. Although some experts will recommend using only cash as a psychological way to manage spending, our budget needs to accurately track our spending and that is harder to do with cash. However, we will focus on tips for managing over-spending in another article.

Step two: categorize

Now it is time to organize all this information from step one. Below is a sample or a starting place (but of course, only you know the right categorization).

Fixed Expenses

• Discretionary:

  • Internet / Cable

  • Phone Bill

  • Other Subscriptions

• Non-Discretionary:

  • Mortgage / Rent

  • Car Payments / Lease

    Variable Expenses

Variable Expenses

• Discretionary:

  • Loan Payments (car, student, credit card)

  • Entertainment (movies, concerts, sporting events, etc.)

  • Transportation (Uber/Lyft, cabs, public transport)

  • Restaurants (lunch, dinner drinks out)

  • Vacations

  • Shopping (e.g. clothing)

  • Beauty (e.g. haircuts, manicures, massage, etc.)

  • Other (e.g. birthday gifts, unexpected one-offs, etc.)

• Non-Discretionary:

  • Car maintenance

  • Household items

  • Groceries

  • Charitable Donations

  • Therapy (if we’re being honest here)

  • Amazon (like, really honest)

Step three: clarify

Let’s take a look: what are your biggest buckets? Where are you spending that you perhaps didn’t know you were spending so much? Perhaps you are spending a lot on groceries AND a lot on dining out — what the heck? You spend way more on taxis than you thought but you thought you were doing so well with taking the bus/subway. Next sub-step is to decide if these spending patterns reflect where you actually want to spend your money based on what you value. Note: spending most of your budget on Uber is not environmentally friendly nor is it fitness-focused.

First, let’s determine where you can make some immediate adjustments if necessary and then we’ll look at any potential longer-term changes. Take a look at your variable, discretionary spending: this section is usually where you can make the most immediate changes that best align your spending with your values. So, you say you want to travel but you don’t have the money? Is there room to lower your entertainment expenses and decide to be more frugal with dining out while local? That way, you can save dining out for the special occasions while traveling, for example.

Secondly, longer-term you can focus on the fixed, non-discretionary items. Like, how much you spend on rent or your car. Perhaps you don’t need to be driving that Ferrari if you find yourself using Uber and/or public transportation. This might be an easy area to cut back and reallocate spending in the areas that are more important to you – e.g. perhaps charitable donations.

Step four: Check

Now that you have figured out your spending vs. your values… let’s keep an eye on our budget compared to how we spend going forward. Are you able to keep with your new-found insight? How accurate are you in terms of being able to live the way you want? It is important to revisit your budget monthly for the first few months and then you can move to annually as you get used to your new spending habits.