Budgeting & Spending: A Practical Framework for Thinking About & Creating a Personal Budget (Post 7)

As we described in our 6th blog post (“Budgeting and Spending: What is a Budget and Why Create One”), a personal or household budget is a spending plan that is based on an estimation of one’s income and expenses over a specific period of time. Ultimately, when we become adults, creating an ongoing detailed 12-month monthly budget, revisiting it regularly as each of us carefully tracks our spending, identifying individual spending priorities (and perhaps personal savings priorities as well) within the constraints of a budget, and having the discipline to live within our budget (which, of course, will evolve in scope and size) are going to be one key to achieving our financial goals and achieving financial independence and financial stability in our lives.

The total amount of income we earn will naturally impact the total amount of money we have available to spend (and to save). So as adults we will have to make choices about what we spend our hard-earned money on. A practical framework we can use for creating a personal or household budget is one which involves making a distinction between “wants” and “needs”. “Wants” are nice-to-haves, “needs” are must-haves. Stated differently, if you need something to survive, by definition that is a “need”, not a “want”. On the other hand, if you would like to have something or do something but don’t need to have it or do it, then by definition that is a “want”, not a “need”. “Wants” will vary by individual given that each of us has our own set of interests, goals and priorities. “Needs” may also vary among us to some degree, although there absolutely will be “needs” that are universal among us as human beings – think food and water, housing, clothes, and healthcare, for example.

Before, however, we try to identify our “wants” versus our “needs” (of course, what is included in each bucket potentially can change over time), it makes logical sense first to step back and try to define broad personal spending categories. The following are examples, in no particular order, of broad expense categories that you may want to consider when you become an adult to classify the various types of expenses you will or may face and, therefore, that you will want to budget for:

Within each of the broad spending categories that you ultimately decide are applicable to you, it will then make sense to lay out – line-by-line -- each type of associated expense you expect to potentially incur. Here are some examples:

After itemizing -- within each broad spending category that ultimately applies to you -- each type of associated expense you expect to potentially incur, we then recommend you take the following set of steps (in order):

1. Label each type of expense, within each broad spending category, as either a “want” or a “need”.

2. With an eye on the total amount of monthly income you expect to earn (since that will naturally impact the total amount of money you have available to spend and perhaps even save), estimate the amount of money you will need to spend and/or hope to spend monthly on each type of expense within each broad spending category. These estimated amounts of money = what you are budgeting. Of course, not all of the expenses we will have as adults will necessarily be month-in, month-out expenses. Some may be quarterly, some may be annually, and some may be one-off expenses. Please refer to our 6th blog post (“Budgeting and Spending: What is a Budget and Why Create One”) for suggestions on how to go about budgeting within a 12-month monthly budget these less frequent expenses.

3. Calculate the sum total of these budgeted amounts and see how the total compares to the total amount of monthly income you expect to earn.

4. If the sum total of the monthly amounts you have budgeted exceeds the total amount of monthly income you expect to earn, then you will need to adjust some or all of the amounts you have budgeted in order to maximize your chances of successfully living within your overall budget. And here is where the distinction you make between “wants” and “needs” can be tremendously helpful!

5. If the sum total of the monthly amounts you have budgeted is less than the total amount of monthly income you expect to earn, then that means your overall budget has a spending cushion and perhaps you can even save some money each month if you successfully live within your overall budget.

Obviously, you can create a budget on paper or on your personal computer. (As an aside, on a computer, Microsoft Excel is a great software tool to use for creating budgets and modifying them as necessary.) Use whichever means of capturing a budget, and making ongoing changes to a budget, are most practical for you. But very importantly, remember that a budget should be a “living and breathing” document. Yes, it is super important to live within your budget. But it also is completely appropriate and prudent to make changes to your personal or household budget as facts and circumstances change. What are examples of facts and circumstances that can change? Your income changes. Your savings change. You move and your cost of living increases or decreases. You need to use, or can use, a different form of transportation to get around. You get married. You have a child. Your interests, goals and priorities change. The tax code changes. Interest rates on debt that you have change. Etc., etc.

Finally, be sure to diligently track your weekly and monthly spending and to compare at least once a month your spending against your budget. By doing so, you will be able to quickly identify whether your spending is within the budget you previously have set for yourself or is beginning to fall outside of it. The earlier you can identify problematic mismatches between what you are spending and what you have budgeted, the sooner you can course correct and bring your spending back in line with your budget. That course correction may involve a) reducing future spending on those expense items on which to date you have overspent (i.e., overspent relative to previously budgeted amounts), b) reducing future spending on other expense items to levels below your previously budgeted amounts for those expense items, c) bringing in additional income (if that is a possibility), or some combination of the three. To clearly illustrate these different avenues that you potentially can take in the event you do find yourself spending more than you have budgeted, let’s walk through a hypothetical scenario:

Let’s say you have created a 12-month monthly budget (i.e., a 1-year budget broken down by month) and the total budget for the full 12 months is $24,000. Let’s further assume that you have budgeted for the full year $3,000 for entertainment and leisure/recreation-related expenses, and you have chosen -- for budgeting purposes -- to spread evenly the $3,000 budgeted amount across all 12 months of the given year. $3,000 for the year divided by 12 months = $250/month that you have budgeted for specifically entertainment and leisure/recreation-related expenses. Okay, now let’s fast forward two full months into the year and let’s assume that by the end of the second month you have already spent $900 on entertainment and leisure/recreation-related expenses. This, of course, would mean that your spending on entertainment and leisure/recreation-related expenses is now tracking ahead of your original budgeted amount, which in this case would be $500 (i.e., $250/month x 2 months). So, assuming through the first two months of the year that your non-entertainment and leisure/recreation-related spending has been in line with what you budgeted, how can you get back on track so as not to exceed your $24,000 total budget for the full year? After all, living within your total budget is really what matters at the end of the day.

One option you could choose is to reduce your average monthly spending on entertainment and leisure/recreation-related expenses over the remaining 10 months of the year. For this remaining period of time, you could, for example, reduce the amount you budget for entertainment and leisure/recreation expenses from an average of $250/month to an average of $210/month. If you were to limit such spending to an average of $210/month, that would allow you to remain within the original $3,000 amount you budgeted for the full year for entertainment and leisure/recreation. ($210/month x 10 months = $2,100. $2,100 + $900 = $3,000.)

A second option you could choose is to reduce future spending on other expense items to levels below previously budgeted amounts. This option could also allow you to remain on track to not exceed your $24,000 total budget for the full year despite going over-budget in your spending on specifically entertainment and leisure/recreation expenses. In our example, the total budget for the full 12 months is $21,000 if you exclude the $3,000 budgeted for entertainment and leisure/recreation expenses. If you are going to choose to spend for the year, say, $4,000 on entertainment and leisure/recreation expenses rather than the $3,000 amount that you originally budgeted (i.e., $1,000 over-budget), then you could simply reduce the amount you have budgeted for all of your other expected expenses collectively by an equivalent amount (in this example, by $1,000). In other words, to remain on track to not exceed your $24,000 total budget for the full year, you could simply reduce the amount you have budgeted for all of your other expected expenses from $21,000 to $20,000. ($20,000 + $4,000 = $24,000.)

Finally, if you are going to overspend relative to your budget, then one other option that may or may not be available to you is to bring in additional income. If you are able to bring in additional income, that additional income can be used to offset additional spending. Assuming you can maintain a dollar-for-dollar relationship between the two, you effectively can remain “within budget” (albeit a higher budget).

Here again, when having to make the hard choices about where to cut back on spending or, for that matter, on what to increase your spending if you have incremental spending capacity, the distinction that you previously have made between “wants” and “needs” can be extraordinarily helpful.

I would love to hear from you. Any ideas, experiences, thoughts, comments and questions….please do share.

Copyright © 2025 Paving Our Path, Inc. All Rights Reserved.