The best way to make a 'realistic' budget, according to financial advisors


Getting a grip on your spending habits by putting together and sticking to a budget can help you feel more financially secure. But many people find the process of creating a budget stressful and confusing, especially if you're trying to do it using the traditional method of accounting for your income and then itemizing your expenses.

That may be one of the reasons that roughly 40% of people have never had a budget, according to a 2019 survey from the Certified Financial Planner Board of Standards, a professional group for financial planners.

If budgeting is something that's tripped you up in the past, you may want to try something different: Invert the process by starting with your expenses and working your way up. Here's what that means and why experts recommend it.

Starting from scratch with your budget

Grow contributor Erin Lowry recommends a budgeting technique championed by Dan Ariely, the chief behavioral economist at Qapital and author of the book "Dollars and Sense." Ariely's method, which Lowry describes as "starting from scratch," involves creating a budget by identifying and listing out essential expenses first.

Use those essential expenses as a foundation and build on them. That means starting out by listing monthly costs that can't be ignored — housing, transportation, groceries, utilities, and health care, for example — to serve as a budget foundation. With those costs accounted for, you can then start adding other important expenses until your monthly expenditures match your monthly income. It's similar to the "reverse budget" in that it will help you get a sense of which expenses are most important.

Amy Shepard, a financial advisor at Arizona's Sensible Money, says that the "starting from scratch" form of budgeting is her "favorite budget in the entire world."

"It's so realistic," Shepard says. "It works so much better than trying to create some abstract budget, because it's based on real numbers."

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Building a budget from the ground up

Katie Brewer, a Dallas-based certified financial planner who runs the financial firm Your Richest Life, says she often works on these kinds of budgets with clients who have trouble budgeting. 

"I go through an exercise with a lot of my clients where we [first] identify the nonnegotiable expenses," she says, like mortgage payments and grocery bills. Then, she asks people to identify expenses that are personally important, such as giving to charities or expenses related to a hobby. Those get preference over other nonimportant discretionary spending.

Here's a quick guide to building your own budget from scratch. First, identify your essential expenses, which might include:

  • Housing — rent or mortgage payments
  • Transportation — car payments, insurance costs, etc.
  • Food — including the money you spend eating out
  • Health care — any recurring medicinal costs, as well as insurance costs
  • Debt payments — monthly payments on student loans, credit card balances, etc.
  • Savings/retirement — critical to include if you want to make saving for the future a priority
  • Phone bills and utilities — would include electricity, and heating and air conditioning expenses

Next, identify your secondary expenses, or what Brewer might call "important but nonessential" expenses, which could include:

  • Costs related to hobbies
  • Charitable giving or tithing
  • Entertainment (cable TV, Netflix subscription, etc.)
  • Contributions to a vacation fund

Finally, identify all of your other nonessential expenses, which would include just about everything else, like impulse purchases, lottery tickets, or money spent getting food delivered when you have a stocked pantry.

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By starting from scratch and using your essential expenses as a foundation, you can build up and remove the wasteful spending from your budget. This should help you establish and stick to healthy financial habits.

"I've referred to it as my No. 1 strategy" for helping people gain control over their spending, says Shepard. 

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