Budgeting Basics: Using Last Month’s Income

Budgeting Basics Using Last Month's Income - picture of back of couple working on budget with calculator

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Sorry ’bout that. I didn’t mean to blow your socks off just yet. It’s just that I’m über excited! First of all, I learned how to use the umlaut on my keyboard. No more “ubers” and much more “übers!” Huzzah! It’s like a whole new world of awesomeness has opened up. It’s completely rocked my world.

But, I digress. The real reason I’m so excited is that today we’re talking about one of my favorite freakin’ subjects of all time: Budgeting!!!

You guys, please take me seriously when I say this: Learning how to budget changed our family’s entire life. Before we learned to budget, we were just like most people. We made plenty of money but had absolutely nothing to show for it. Now, we’re debt free, work for ourselves, and we’re building our net worth like rockstars. And it all points back to one thing: Budgeting.

Creating a Budget that Works

Creating a budget that works isn’t always easy, nor is it something you get right on the first try. Learning how to budget takes practice and patience. But, by creating a budget and sticking with it, you’ll start recognizing what you’re doing and discover the proper steps to take action and fix it.

Over the years, we’ve experimented with different budgeting techniques. Some of them have worked extremely well, others have not. Through all of these triumphs and flops, we’ve realized budgeting is a lot easier when you’re accurately representing how much money you actually have to spend. The best way to do just that is to budget based on last month’s income.

Benefits of Budgeting

Before we talk about how to budget using last month’s income, let’s chat a bit about why budgeting is important. Here are a couple of quick reasons:

  1. Helps you control your money. – One of the biggest money mistakes people make is that they allow their money to control them, rather than the other way around. We allow money to have a power over us that it shouldn’t have. Money may not be the most important thing in the world, but try telling that to somebody who is struggling. When you’re worried about scraping by just to pay the bills, money can control your life. You’re constantly stressed out, and it can really mess with your mind. Even if you aren’t struggling, controlling your money is important. Money is a tool that gives you the opportunity to do and experience the things you really want. A budget helps you take control of the situation.
  2. You tell your money what to do. – How does a budget help you take control? Because you’re telling your money what to do. By creating a budget, you’ll lay out an exact money plan for the month. Each dollar has its own job, and you’re budget tells it where to go. Instead of working harder for more money, a budget helps you make the most of what you have by giving your money instructions.
  3. You know where your money is going. – Have you ever found yourself wondering what’s happening to all of your money? Have you ever said, “I think I need to save $50 so I can pay the electric bill this month…but I’m not sure?” When used correctly, a budget eliminates the waffling. There’s no more guessing. You don’t have to worry about how much money you need to save or how to save money fast, because you have already taken it into account. You don’t have to wonder where your money is going. You already know because you budgeted for it. If you find a leak, having a budget makes things easy to fix. Just bust out the budget and your expense tracker to figure out what went wrong. Fix it, and make the adjustment for next month.

Why do Budgets Fail?

Of course, plenty of people try budgeting for a little while and give up. Their budget fails. Sure, some of them never really give it a chance. There are a few who don’t really want to change and half-ass the whole thing, dooming themselves to failure from the start. But, for the most part, anybody who takes the time to put together a budget really does want it to work. They want to succeed. What they don’t understand is that budgeting can take a little bit of time to master. It may take a few tries to get it right.

This can be especially discouraging for baby budgeters who have never tried a budgeting system before. They get excited to make a change, put themselves out there, and then flop. They may try again, but – if don’t understand how to properly execute their budget – they’ll get the same result and swear off budgeting all together. It’s really unfortunate, and they could be missing a huge opportunity to change their financial destiny.

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Fixing Failed Budgets

Budgeting is a skill that can be learned. Really, anybody can do it. But, it helps to get yourself started on the right foot.

One of the reasons so many budgets fail is because they are based on a projections. You need to project how much your electric bill is going to be. You need to estimate how much money you’ll need for food each month. You end up guessing how much money you’re going to make that month. Most budgets are based entirely on a series of guesses.

So, how do you fix that? Become more accurate in any way you can. Eliminate the guesswork.

Using your expense tracker, determine how much your variable bills were last month. Then, estimate your expenses this month. Figure out how much you spent on groceries last month, and budget for a similar amount this month. Tweak your budget until you get really good at estimating those costs.

With your expenses out of the way, it’s time to strive for accuracy on the income side. The cool thing is that you can do this with complete accuracy. Instead of guessing how much you’ll make at the end of each month and paying your bills with that, use the money you already have. Base your budget off of last month’s income. Here’s how!

How to Use Last Month’s Income to Budget

The type of budget we recommend is called a zero-sum budget. Essentially, you’re going to assign every dollar you earn into a predetermined category (like groceries, utilities, savings, etc.). You’ll continue “spending” that money on paper until every penny has its own special spot. You “zero” out all of your earnings. And, since you already know what you made last month and have that money in your hand, the most accurate way to budget is to base all of your spending off of last month’s income.

Here’s the mathematical formula for you:

Last Month’s Income – This Month’s Spending/Saving = Zero

Still with me? Here are the steps:

  1. Get paid.
  2. Total the amount of money you received from last month’s pay checks.
  3. Create your spending categories.
  4. Use the money you were already paid to fill in expenses for each category.
  5. Continue “spending” your income into each category until your spending equals your income.
  6. Make adjustments to the amount in your expense categories as needed.
  7. Repeat the process every month.

Remember, you are spending and saving only the amount of money you made in last month – no more, no less. (Also, take note that “savings” is considered an expense!) The total amount you spent and saved must equal the amount you earned last month. If you need more money for one category, spend less in another, one way would be by checking out ebates to see if a purchase you need to make could be less expensive via their site, so that it balances. If that’s not possible, it’s either time to adjust your spending by habits or you need to find a way to make more money.

Yes, unexpected expenses will pop up from time to time. This last year, we had issues with our A/C and water heater that we didn’t budget for. In those instances, it’s time to dip into your emergency fund. However, if you’re regularly going over budget, you need to look at your spending again.

Wrapping Up

By basing your zero-sum budget on last month’s income, you already know exactly how much money you have available for the month. Not only does it simplify the budgeting process, but it also makes your budget more accurate – giving you a greater chance at success. And, when you have success, you’re more likely to stick with your budget and change your financial future!

Good luck! And keep on budgeting!

This is the third installment of our “Supercharge Your Savings” series. You can find the other articles in this series listed below:

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  1. MomofTwoPreciousGirls says:

    Love budgeting this way! It changed our lives four years ago. We had a tough time because we each had small salaries but the bulk came from bonuses so we never knew what was coming in. Once we got ahead, it simplified everything. Other than a couple of bills that get pulled on auto where I can’t change the date, I also pay EVERYTHING on the first. We also divvy up some funds to cash on those areas we tend to have trouble with (groceries and clothing etc.). The one thing we also were able to do was set aside funds for auto and home maintenance monthly. So we don’t dip into our efund, like last month when we found our kittens had shredded the dryer vent! Hubby used his lowes card for the extra 5% off and the next day I paid it with funds from our home maintenance fund. No rearranging our budget for the month and no touching the efund.

  2. I don’t know that we really do a full zero-sum budget (actually, I know we don’t 😉 ), but that is what we do for our variable expenses and extra mortgage payments. Have to make sure we have the money before we truly spend it, right? I love the thoroughness of this explanation. In fact, I think way back when, your blog actually introduced me to the concept of zero-sum 🙂

    1. Ha – back in the day! Zero-sum budgeting is what we gravitated to at first for some reason, and we still use it today. It just makes the most sense in our minds!

  3. I usually tell people that throw up every excuse not to start budgeting or saving money that It’s not just about retiring early, managing your money and building wealth opens doors you don’t even know are there right now. Managing money opened doors for you two, how alien is it to you guys at this point that you could still be stuck at your old jobs!
    I’m pretty bad at budgeting, as much as I hate to admit that to fellow bloggers. I usually don’t buy what I don’ t need, but I”m pretty sure even I start seeing that $10k sitting in my checking account and start thinking.. hmm, I can afford to splurge a bit. I did join personal capital about a month ago… finally, what the hell was I waiting for! I showed my best friend a couple days ago and he said “that’s awesome!” then ran home and he signed up too. I’ll have to attempt to budget more seriously, and personal capital will help now.

    1. Right on Kyle! Getting on a budget really changed our life. We were a lot like you. We’d only buy what we needed…or so we thought. Then we started tracking our spending and budgeting our money. It was like money started appearing from everywhere. We had no idea how much money we wasted until we got on a budget.

  4. What a great post full of awesome information on my favorite topic as well…budgeting.

    I always love to read how others budget and how they came up with their best version for their family. I am always asked where to start when beginning to budget, and how you mentioned starting on last month’s income is wonderful advice.

    Thank you for the post

    1. Thanks Addi! I really think that using last month’s income is the way to go. That way, you already know exactly how much you have to spend and save. Otherwise, you’re just guessing 🙂

  5. I love zero based budgeting. We are still working on getting a month ahead, but when we get there? ! It’s going to be on!

  6. Budgeting was the hardest thing for me! I didn’t understand where our money went every month, but now I see where out excess spending went and we have been able to pin this down and we are on our way to being debt free and living life the way we want! Great article!!!

  7. We just recently started a blog. Right now just for our personal journey, but eventually I hope to make it into something great like you guys have going here!!! Do you have any advice?!?

    1. Feel free to email me with any individual questions you have! We started the same way – documenting our individual journey. I am happy to help!

  8. Yay umlauts! (Yeah I haven’t figured out where the one on my keyboard is.)

    I think one of the biggest mistakes people make is just not having realistic numbers. They read some PF books/blogs and set out to make radical changes, which aren’t sustainable. It’s a process, people!

  9. Zero-sum budgeting sounds great. I feel like it can get a little messy when you are spending money from different places though – checking account and multiple credit cards. Do you find zero-sum budgeting works better when you are paying for things in cash?

  10. So other people love budgeting too? It’s not just me!
    I love the idea of a budget being something that adapts to your actual income and living expenses – not something that’s set in stone twelve months in advance.
    I also place a high value on being able to account for all your money so you’re able to prioritise your spending.
    Now can you write an article about those umlaut things?

  11. It’s super funny — I used to think of us as allergic to budgets, because I thought the only kind you could have is one with very strict line items. And we tend to do the “pay ourselves first” approach of hiding most of our income in savings and investments, and living off the remainder. But then I realized that that IS a type of budgeting, and it’s even the “live off last month’s income” kind. Hahaha! I’ve secretly been a budgeter all this time. 🙂

  12. I recently made my monthly budget. So far it’s good because I have been able to see where money goes and it is spend. Though it is not yet that detailed, I am still making some changes and learning from other finance blogs on how I can maximize the use of budget.

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