Detailed budgets are too complicated to be useful. That’s why you should start with an Undetailed Budget to eliminate debt and build wealth.
The First Step is Always a Budget
Every personal finance guru says that the first step to taking control of your money is to make a detailed budget.
“This is the way.”The Mandalorian, clearly referring to detailed budgets
“It is known.”The Dothraki, also clearly referring to detailed budgets
Well, I disagree.
Making a detailed budget is one of the most difficult tasks in personal finance. You need to know, in advance, how much you are going to spend on a whole bunch of categories next month. The master personal-finance wizards at Quicken recommend 8 categories. The Balance has 52 categories. The Budget Mom has over 70 categories. The Frugal Gene has over 90 categories.
So, you’re telling me, that someone who has never tracked their spending and has absolutely no handle on their money should start by dividing their money into 90 categories!? As the saying goes, that sounds like trying to untangle a barrel of fish hooks.
Mastering personal finance is hard, but it doesn’t have to be complicated. And, the process definitely shouldn’t start incredibly complicated.
That’s why I created the Undetailed Budget. It is a simple, intuitive way to wrap your head around your own finances. You can figure out your Undetailed Budget in a few minutes, and it will guide you through the rest of your financial journey.
Keep reading to learn how the Undetailed Budget works and how to build one of your own.
The First Step is an Undetailed Budget
I hate detailed budgets.
I don’t have one, and I never have. Many years ago I tried, over and over, to build and follow one. I love Excel and I use personal finance tracking software, so it should be easy for me. But there are just too many moving parts.
So, I created a simple way to divide my cash flow into exactly five areas that interact with one another. I can wrap my head around five categories.
The five categories are:
- Total Income
- Recurring Expenses
- Discretionary Income
- Personal Spending
The magic of the Undetailed Budget comes down to two sentences:
Income minus Recurring Expenses equals Discretionary Income. And, Discretionary Income can either be used on Personal Spending or Savings.
To start your journey, download the Personal Finance Quick Start Guide. Page 2 is the Undetailed Budget Worksheet, and the rest of this article will help you fill it out.
Undetailed Budget: Income
Income includes all money you receive from all sources. For most of us, this comes from a job. But, it should also include interest, dividends, side-hustle income, finding a $5 bill in the street, $20 birthday cash from grandma. It should include everything.
The method to determine which income to use might be different, depending on how you earn.
If you are salaried and get paid twice a month, it’s easy, just use two paychecks.
If you are salaried and get paid every two weeks, also use two paychecks. Yes, I realize that you will get a third paycheck in two months each year. But, you need to live on two paychecks the rest of the time. Plus, this way, when you do have three-paycheck months, you can put all of it to work. You’ll see how later.
If you have commissions or other wild income swings, you have some decisions to make. Depending on how wild your swings are, you may have to be more conservative in your estimate. Look at the last 6 or 12 months and determine the high and low income amounts. Are there any months that you didn’t make enough to live on for a month? If that’s the case, you may need to set up a separate account to collect commissions and run it like a Retained Earnings account at a business. Then you can draw a regular salary equal to a very conservative estimate of your monthly average.
Whichever way you do it, when you have an estimate for your monthly income, round it down to the closest $50. Put that number in the top box on the Undetailed Budget Worksheet.
Undetailed Budget: Recurring Expenses
Your recurring expenses may take a bit of digging. Start by pulling out your bank statements for the last few months. Be sure to check all of your checking accounts and credit cards. Find every recurring transaction.
You are looking for any transaction that will happen, whether you spend a penny or not. This can include your rent or mortgage, all utilities like gas, electric, water, cable, internet, and cell phone. Plus, you want to include all subscriptions like Netflix, Hulu, Disney+, subscription boxes, etc. Also, don’t forget health insurance, life insurance, or any other recurring expense.
And, this box includes the minimum payment on every single debt you have. All of your credit cards, personal loans, payday loans, student loans, car loans, primary mortgage, HELOC, a loan from your mom… everything.
Add all of your recurring expenses and round up to the nearest $50. Put that number in the Recurring Expenses box on the Undetailed Budget worksheet.
Undetailed Budget: Discretionary Income
After you have found your Income and your Recurring Expenses, your Discretionary Income is easy. Just subtract your Recurring Expenses from your Income. Enter the number in the Discretionary Income box on the Undetailed budget worksheet.
Now you know exactly how much money you have control over every month. Your Discretionary Income is money that you get to decide how to use every single month.
There are only two things you can do with your Discretionary Income: you can spend it, or you can use it to achieve your goals.
Undetailed Budget: Personal Spending
Decide how much of your Discretionary Income you want to allow yourself to spend. This will be all your spending money next month, so be realistic.
As always, this is a non-judgement zone. I absolutely do not care what you spend your money on. You earned your money, and you should be able to spend it as you wish. However, there are a few rules that will help you win with money.
First, you need to live the first of the Four Pillars of Personal Finance: Spend less than you make.
That means that the amount you allow yourself for Personal Spending needs to be less than your Discretionary Income.
Second, if you haven’t made the financial progress that you would like, then you need to decide how deep to cut your spending.
So, decide on an amount, use a nice round number, and enter it into the Personal Spending box on the Undetailed Budget Worksheet.
Undetailed Budget: Savings
The final box on the Undetailed Budget Worksheet is Savings. Sure, this money could potentially be put into a savings account. But, I like to think of it as the money you are going to use to make progress on your goals.
Subtract your Personal Spending from your Discretionary Income and enter that number in the Savings box on the Undetailed Budget Worksheet.
If you are doing money coaching with me, we are working on the 12-Steps to Eliminate Debt and Build Wealth. The money in the Savings bucket is the amount that you are going to put toward achieving whichever step you are on right now.
When you are first starting out, all of this Savings money goes toward a 1-month emergency fund. Then, when that’s done, you move on and put every single penny toward your high-interest debt until it is gone. Each time you complete a step, you just pour this Savings bucket on the next step.
Why The Un-Detailed Budget Works
First, you can see how much of your income is spent before the month even starts.
Second, you decide, in advance, how much progress you are going to make toward your goals this month.
Third, you can see which of these five categories is holding you back. And, you can decide how to remedy it.
Is your Income too low? In the short term, you can start a side hustle. In the long term, work on your career, maybe go back to school.
Are your recurring expenses too high? In the short term, you can cut subscriptions, cell phone, internet, cable. In the long-term, you can work to reduce housing and transportation costs.
If you have plenty of discretionary income but no savings/progress, then it is time to focus on personal spending. The first step is to separate your income from your expenses by pouring all income into a Savings Account and only taking out what you need in two transfers per month. That way you only have access to the amount you decided you were allowed to spend.
Making Progress with the Undetailed Budget
My favorite part of the Undetailed Budget is that it is so simple and straight forward. As a result, it is easy to adjust as you make progress.
Build a Foundation
When you are just starting out, all of the Savings bucket should go toward building your 1-month, temporary Emergency Fund.
Then, when that’s done, all of the money you were putting toward your emergency fund goes toward eliminating your High Interest debt. The magic really starts to happen when you start paying off these debts.
When, the first High-Interest debt is eliminated, then the minimum payment for that debt is no longer a Recurring Expense. That means your Discretionary Income goes up! And, if you keep your Personal Spending the Same, then you have just freed up money to make progress on your next goal, which is likely the next debt.
Build a Routine
After you have eliminated your high interest debts and have freed up all of those minimum payments from your Recurring Expenses, you can quickly save up to get a Will. And, you can start contributing enough into your retirement plan to get your employer match. Don’t forget, this will slightly decrease your Income, so don’t forget to update your Undetailed Budget.
Then, you can attack your 6-month emergency fund, with all of the money you used to spend on your high-interest debt payments. When you have the 6-month emergency fund filled up, you tackle all remaining non-mortgage debt.
Build a Legacy
After all non-mortgage debt is paid off and those payments are removed from your Recurring Expenses, it is time to boost your retirement savings to 15% (which decreases your Income), start saving for your kids’ college (increases your Recurring Expenses), investigate an HSA (increases your Recurring Expenses), maybe boost your Personal Spending and put anything else toward paying off your mortgage early.
As you can see, the Undetailed Budget is a dynamic tool that grows and changes with you as you eliminate debt and build wealth.
Best Way to Start the Undetailed Budget
Getting started is easy. All you need is the Personal Finance Quick Start Guide. In it you will find 10 questions to help you figure out where you are and where you are going. Then, there is the Undetailed Budget Worksheet. And, the third page is the 12-step plan to eliminate debt and build wealth.
You can do it. I believe in you. But, it is going to be difficult.
This stuff is not complicated, but it is hard. So, if you ever need help, please let me know. I’m happy to assist. Check out my Personal Money Coaching Services for more information about how to get in touch with me.
Eliminating debt and building wealth is hard. But, it shouldn’t be complicated.
Detailed budgets are complicated, and I hate them. The first step of any journey should be easy, and a detailed budget is absolutely not easy. And, it is not necessary either.
I love the Undetailed Budget because it is so simple. You only need to know five numbers. You can learn, memorize, internalize, and understand five numbers.
Plus, the Undetailed Budget is dynamic. It grows with you. Paying off debt removes Recurring Expenses and frees those funds up for more progress on your next goal.
You can do this. You can even do it by yourself. Just grab my Personal Finance Quick Start Guide and get to work. But, if you need a little help or additional motivation, check out my Personal Money Coaching Services. I’m happy to assist.
What to Read Next
For more information, check out these articles that offer more detail about these topics. Enjoy!
- Personal Finance Quick Start Guide
- The Four Pillars of Personal Finance
- Personal Money Coaching Services
- The 12 Steps to Eliminate Debt and Build Wealth
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.