How did I build my budget?

One of the first steps to getting yourself on course, financially, is to create a budget. Aaahhhh!

I know, many people hate the idea of budgeting, can’t make one, can’t follow one, etc. There are also a large number of FI folks who have been able to move towards FI without keeping strict budgets. However, I would suggest to you that even these people started out by getting a handle on what they were making in $, what they were spending in $, and what the difference was. This is the same as going through the budgeting process and creating a base budget.

I find budgets to be very helpful, though I don’t stick to one religiously. I have an idea of what I’ve spent in the past, build a budget at the beginning of the year, and then track how I am doing against it monthly. Typically I blow past the budget on some items, and under-spend on others. I also adjust as the year goes on, to try to stay within my revenue goals.

So how I go about creating a budget? Like most folks, I started with my actual spending and my paychecks. Remember, the key thing for a budget is to get to where Revenue – Expenses = surplus (what is left over to save/invest). If you are getting a negative number, then you need to either increase your revenue (side hustle?) or decrease your expenses (ex. Cut out the expensive cable bill).


Looked at my paychecks and determined my take home pay. I had already adjusted my W-4 (the tax withholding form) with my employer so that I was getting taken out almost exactly what needed to be taken out to not get any money back at the end of the year (i.e. I might owe a little). Why give the government an interest free loan? I also checked how much I was putting into my employee 401K, for reference in tracking my investments. So I knew what I was getting every 2 weeks in pay. I then multiplied that by 26 (# of paychecks in a year) and divided by 12 (# of months in a year) to get a monthly revenue number. After doing all this, I arrived at 3 months of revenue = $15,603.96


For this, I turned to my bank and its electronic statements (or you could use the paper statements they can send you). My bank lets you easily download the last 3 months of your bank statements, showing you how much you spent on each transaction, as well as each deposit. With this information I had a key decision to make: How did I want to classify each expense, so that I could determine how much I was spending on it each month? It doesn’t do much good for a budget to have too many categories (it gets hard to track) but you should have enough so that you can make decisions about spending (what to cut back, what to add to, etc.)

After review, I chose the following categories:

  • Home Mortgage
  • Property Taxes
  • Home Insurance
  • Utilities (Gas, electric, water)
  • Phone/Cell Phone
  • Auto Insurance
  • Life Insurance
  • Groceries
  • Roth IRA investment
  • Charity
  • Vacation Funding
  • Dining Out
  • Home Repair
  • Other (areas that were not easily classified)

With that I created a spreadsheet and determined what I had spent on that for the last 3 months:

Category Expense
  Home Mortgage, taxes, insurance ($5,950.47)
  PSE&G ($839.45)
  Verizon ($686.20)
  Water Bill ($206.50)
  Life Insurance ($131.85)
  Auto Insurance ($366.52)
  Chiropractor $0.00
  Groceries ($1,297.86)
  Disability ($288.90)
  Roth IRAs ($2,750.01)
  Savings ($300.00)
  Charity ($300.00)
  Vacation Funding ($750.00)
  Dining Out ($140.57)
  Home Repair ($203.27)
  Other ($489.01)
Total Variable Expenses ($14,700.61)

So revenue of $15,603.96 and expenses of $14,700.61 gives me a surplus of around $900. OK, a good start. Please note that I gave myself an allowance of $1,000/month for my personal use (gas, lunches & snacks, tolls, etc). This money was already taken out of my revenue above, and I tracked it separately. That is why you don’t  don’t see that in the expenses above.

With that in mind, I created a budget for the remainder of the year that looked like this.

Revenue Budget
Salary from Work $4,733.31
Other $0.00
Total Revenues $4,733.31
Mortgage ($1,376.29)
Insurance ($83.25)
Property Taxes ($523.95)
Gas & Electric ($313.83)
Phone ($246.14)
Water Bill ($66.50)
Life Insurance ($43.95)
Auto Insurance ($120.78)
Groceries ($378.76)
Roth IRAs ($1,000.00)
Savings ($100.00)
Charity ($100.00)
Vacation Funding ($100.00)
Dining Out ($50.00)
Home Repair ($100.00)
Other ($50.00)
Total Expense (4,653.45)
Operating Revenue 79.86

Note that my revenue went down, because I put more money into my company’s 401K savings plan.

At this point, I had an idea of how much I needed to spend each month. All I had to do was track it monthly, see how I did, and make potential adjustments.

Revenue Budget Actual YTD Variance
Salary from Work $56,619.50 $62,816.57 $6,197.07
Other $0.06 $5.08 $5.02
Total Revenues $56,619.56 $62,821.65 $6,202.09
Mortgage ($16,515.48) ($16,515.48) $0.00
Insurance ($999.00) ($999.00) $0.00
Property Taxes ($6,287.40) ($7,205.47) ($918.07)
Utilities ($3,765.98) ($1,498.98) $2,267.00
Phone ($2,953.68) ($3,472.88) ($519.20)
Water Bill ($798.00) ($396.93) $401.07
Life Insurance ($527.40) ($527.40) $0.00
Auto Insurance ($1,449.36) ($1,316.59) $132.77
Groceries ($4,545.12) ($3,970.84) $574.28
Disability $0.00 ($96.30) ($96.30)
Roth IRAs ($12,000.00) ($11,995.00) $5.00
Savings ($1,200.00) ($1,200.00) $0.00
Charity ($1,200.00) ($1,824.90) ($624.90)
Vacation Funding ($1,400.00) ($2,350.00) ($950.00)
Dining Out ($600.00) ($1,343.96) ($743.96)
Home Repair ($1,200.00) ($1,318.00) ($118.00)
Other ($600.00) ($2,032.39) ($1,432.39)
Total Expense ($56,041.42) ($58,064.12) ($2,022.70)

So I ended up making about $6K more than expected (didn’t account for pay raise) and spent about $2K more than expected. I could then make additional adjustments for the new year.

Overall, it’s a fairly flexible budget. I make enough money and have a sufficient emergency fund to be able to account for the minor ups & downs, and can make adjustments as things go.

So how do you guys budget?

Other Links to budgets:


Using FIRECalc tool to determine FI status

One of the nice free tools that are available on the internet is the FIRECalc tool (see list to right). This tool allows you to put in a variety of data and variables, and try out different scenarios to see if you meet your goal, based on historical performance. The tool uses stock market history and your portfolio choices to try and predict how well you should do for a certain period of the future.

While not perfect (nothing is) it is a good first step towards exploring your goals and how close you are to FI. I will be discussing other tools in the future, but this is an excellent first start.

When you open the FIRECalc page, it provides a description of the model, what it does, how to navigate, etc. It is here where you start, putting in your annual spending, your portfolio value (401K, IRA, 403b, etc.), and the number of years you expect to be “retired.” The program will use this as a basis for determining your success.

The next tab is where you put in “other income” during retirement, above and beyond your retirement assets. Here is where you would put in your Social Security or pension benefits.

The next tab is the “not retired” tab, where you can put in how many additional years you intend to work before acting on your early retirement plan. It also provides a place to show the additional money you intend to invest during this time.

The spending models tab allows you to input the plan for inflation, how your spending power will go (i.e. adjusted for inflation, high expenses to start and less as you grow older, using a percentage of your portfolio, etc.) This lets you look at a variety of options on how you plan to spend, to see if you can achieve your goals.

The next tab is for your portfolio. Here you can use a consistent historical average, or provide your own asset allocation. Again, this allows you to look at the range of options and “play” with them to see how it would affect the result.

There is an optional tab for portfolio changes, lump sum additions to your portfolio (like inheritance, home sale, etc.)

The last tab shows a variety of investigation options you can get from the result, including changes to your allocation, delaying retirement, and spending levels. Just another set of options to play with to further analyze and refine your plan.

Once you are done entering all your information and options, just click on the “submit” button at the bottom to get the results. It will determine, based on the period it studies, how often your plan will succeed or fail, and will provide the lowest, highest, and average portfolio balances for you at the end.It should give you a “big picture” view of how your plan worked out. Now you can go “tweak” some of the entries to see how you might do.

Good luck, and I hope it provides you with some good news!

Mr. 39 Months