Creating a Budget


Budgets are a necessary tool to track your income and expenses. Without a budget, you're flying blind, no matter how much money you make. Even sports players and celebrities making millions of dollars go broke from losing track of where their money is going.

Budgeting is not supposed to feel sexy, and for many of us, it's a blow to our ego. Making a budget might feel like admitting you have a money problem. You know what? You might. But how would you know if you never put a budget together?

Do you really know how much money you spend every month? Are there any subscriptions you forgot about that you're still paying for? How much of your monthly income do you spend on eating out? If you can't readily answer these questions, don't worry, most of us can't. But once you wrap your arms around your finances, you will feel washed over with relief and a new sense of control.

Getting Started

Make sure to gather up all your financial statements related to your income and expenses. Here's a list of common examples:

  • Paystubs
  • Bank statements
  • Credit card bills
  • Mortgage or auto loan statements
  • W-2s or 1099s
  • Investment account statements

This isn't an exhaustive list. For example, you might have rental properties or other sources of income. The end result we want to achieve is a complete and accurate understanding of where our money is coming from (income) and where it's going (expenses).

Calculating Your Income

Sum up all your income over the last twelve months from all your sources. This is usually pretty easy if you have regular streams of income, like a steady job. If your income is more variable, use the last twelve months to come up with a monthly average. If you don't have twelve months of income history, then you can approximate with the history that you do have, or approximate for yourself how much monthly income you expect going forward.

Calculating Your Expenses

Next add up all your monthly expenses. Don't forget that not all expenses happen every month. If you have an annual subscription for example, make sure to turn it into a monthly average and include it as well, otherwise you'll be underestimating your expenses.

Income Minus Expenses

Next subtract your total monthly expenses from your total monthly income. If you get a positive number, i.e. if your income is higher than your expenses, you're already at an advantage, and it might be time to move on to establishing an emergency fund and contributing to retirement. If you get a negative number, then it's time to take a look at your expenses.

Categorizing Your Expenses

Categorizing your expenses is always recommended to help with budgeting and analysis. For budgeting, consider an approach like the 50-30-20 method. This method has three categories, Needs (50%), Wants (30%), and Investment / Repayment (20%). While this split doesn't work for everyone, it can be a valuable benchmark or starting point. For analysis, apps such as Copilot can sync with your financial institutions and categorize your expenses into categories like Shopping and Entertainment and Utilities to dive deeper into where your money is going each month.

Reducing Expenses

Whether your expenses exceed your income or you're just looking to increase your excess income, use your new budget to determine areas where you can save money. Some examples could include eating out less, cancelling a subscription or membership you forgot you had or don't use, or shopping around for alternatives to your normal expenses.

Monitoring Your Budget

Now that you have your budget in place, make sure to update it at least every month. I use Copilot, and at the end of every month I go through all my expenses to categorize and track all the money I spent that month. Copilot can also track your net worth and investment accounts, as well as set up budgets for specific categories and alert you when you exceed them or are on track to exceed them for the month.

Again, this isn't meant to be an exciting exercise, but it's also not meant to take a ton of your time. Once you get in the habit of monitoring your budget, it can be as little as checking an app like Copilot for 2 minutes per day or updating a personal spreadsheet once per month.