A personal budget is a decent amount of work. A minimal budget aims to reduce the effort to produce a budget planning document.
What is a minimal budget?
The minimal budget is the budget with the least effort. It is for people who have simple finances and who do not struggle with making ends meet every month.
A minimal budget focuses on what you save over what your expenses are. The savings include medium-term goals, as well as long-term financial goals. Medium-term goals may be large purchases in the next 3-5 years. Long-term goals can be saving for retirement or becoming increasingly financially independent.
What do you need to prepare a minimal budget?
Time and organization
Depending on how organized you are, you will need between one and three hours to draw up your personal budget. Using our template spreadsheets speeds up the process. We recommend that you stay organized and store your budgets in a folder, as you’ll need them regularly.
All incomes for the year
You need to collect all information about the income you are planning to have. This should include income that you receive regularly, such as bi-weekly or monthly. It should further include income that you receive less frequently, such as tax refunds or business income that fluctuates.
All categories you plan on saving money for
You need to have a list of goals you want to save money for. Each item in the list needs to include:
- a description for the goal,
- the target amount you need to save,
- a target date by when you want to achieve this financial goal
- optionally what motivates you to achieve this goal
I’d suggest also sorting the list in the order of flexibility with the target amount or date. This does not mean sorting it by amount or date. Instead, you want to sort it by how important it is for you to hit the goal with this amount or that date. You want to think about which goal you are most flexible with. You could either achieve it later or at a smaller target amount.
For example, if your goals are “Buy a car for $35,000 in three years” and “Save for a down payment of $30,000 on a house in 5 years”. Which one can you more likely be flexible on? Would you rather buy a cheaper car in three years or rather save for the down payment one more year? In other words, which goal would you fund with priority over the next one?
If you have more than three goals, I recommend you to think about this in pairs. Is goal A more important than goal B? Is goal B more important than goal C, and so on? This is an important exercise. Therefore, I recommend you take notes, why you make these priority decisions. This will come in handy when you review your goals and realize your priorities have changed.
If you already have saved money towards a particular goal, then take note of the amount. The target date should stay the same.
What you don’t need for a minimal budget
Usually, for any budget, you itemize all expenses in categories that make tracking easier and allow you to think about ways to reduce each category.
However, to use a minimal budget, you do not struggle with meeting your planned expenses. If you have enough money left at the end of the month to cover your savings goals and more, then you don’t need to go over all the itemized expense categories.
Let me emphasize that you need to be able to reach your saving goals. That means, if at the beginning of the month you would put aside the money for your savings and investment goals into a separate account, you would not be broke at the end of the month.
Preparing the first minimal budget
If you worked out your savings and investment goals and collected your income sources, then you are ready to draw up your first minimal budget. You will be surprised how little effort this will be.
1. Decide your budgeting cycle
A meaningful budget needs to span 12 months’ worth of income and expenses. Because most people spend differently during the year. Some people spend more during the holiday season, others spend more going on summer vacation.
However, your budget cycle does not have to be the calendar year. As this is a personal budget, you can choose to do your annual budget around your birthday. This makes a nice gift to yourself to get financial peace of mind. If you plan a family budget, you can choose a time where life is not so busy and you have space to think about the past and future of your family.
Now for your first budget, you can just start right now and plan 12 months into the future. This would be much, much better than procrastinating until your ideal budgeting time comes around. If you know there is a better time to do this, you can simply do your first personal budget review at that time and plan 12 months forward.
2. List all your incomes and calculate the total
For this, you can use a spreadsheet such as Excel or Google Sheets. I prefer Google Sheets because it never gets misplaced and it is easily shareable between couples. But the choice is yours, and Office 365, can provide the same conveniences.
There is no need to use computer tools. You can as well do this on loose sheets of paper or in a notebook. There are even special notebooks available that should fit the bill. However, with pen and paper, you need to add and subtract by hand or use a calculator.
When the list is complete, you want to tally your monthly income figures as well as any irregular numbers. If you don’t know when exactly the irregular payment will arrive, then add it to the annual column.
3. List all your savings goals and calculate the monthly contributions
Next, you list your savings goals and calculate the monthly rate you need to save for this goal.
To calculate the monthly goal, you divide the target amount by the number of months between now and the target date. With our budget template spreadsheet, you will only need to provide the target amount, the date, and the already saved amount and we calculate the rest.
Calculate the total of all monthly savings.
4. Subtract the Monthly income from the monthly savings
Now you need to subtract the planned savings total, from the planned income total each month. Our personal budget template does this for you.
This difference is the amount of money you can spend every month in total.
5. Final review
Please, review the numbers and make sure they can cover your usual expenses. They should, as this was a prerequisite of you using the minimal budgeting method. If the numbers don’t look as expected, you need to find where you might have made a mistake in the input.
With these simple steps, you have finished your first budget plan. Now you need to track your plan every month to ensure that actual numbers match the plan.
Tracking your minimal budget
Monthly, you need to collect your actual values of income and savings to compare them to the plan in the budget.
Once a month you need to sit down and enter the actual incomes numbers into the budget template (which is no template anymore, but your budget document).
Make sure the numbers are accurate. Any changes later will be frustrating.
When you have entered the incomes you also want to enter the actual amounts you put away into a savings account and an investment account.
Make sure that the savings totals add up. The planned balance on your personal budget spreadsheet should match the balance on your savings account.
3. Spending money on your savings goal
If you have spent any money on your planned goal you need to make an adjustment entry for the savings goal. You can enter a negative number for the expense, such as -$30,000 for buying that car. You further want to make sure that you don’t have any monthly savings in that row, as you otherwise would have borrowed that money from other goals.
4. Assess your budgeting success
Finally, you should check if your actual spending was in line with the planned budget.
If it was, then pad yourself on the back and celebrate. Yes, celebrating your wins is a big motivator to keep on being frugal and making savings toward goals a priority in your personal minimal budget.
Most intuitively frugal people do have money left at the end of the month. You can now decide what to do with it. You can leave it as residual in the account, to have a buffer for the next month. Or you can plan to reward yourself with special experiences, like going to a spa, travel, or treat yourself to something nice. All major purchases you have planned as savings goals anyway.
If your income did not match the plan you may want to look if it is anything you will make up in the next months or if you need to adjust your plan because something has changed in your life.
If your savings goals were not matched due to spending more than you are used to, then you need to think about corrective actions.
Evaluate if the reason for the shortfall was a shift forward in spending. For example, you might have bought clothes for the winter, and are all set for the next few months. In such a case you can make up that difference in the next months. I’d recommend adding the shortfall of this month to the savings targets of the next month. Usually, you only need to adjust one of the targets.
If the extra spending has no particular reason, then you violated your premise for a minimal budget, that your expenses are overall in line with your savings goals. This is OK if it happens once in a while. But don’t let that happen repeatedly or you need to go and create a full budget and analyze your expenses to reduce spending.
Renewing your minimal budget
When you finished month 11 of your budget cycle, it is time to think about your next 12-month budget.
You need to create a new page in the spreadsheet. The easiest way to do this is to copy the existing page/tab and clear all the actual tracked numbers. Make sure you also adjust the name of the tab and maybe order it all the way to the left.
Review your goals and make adjustments
When you have a new empty budget spreadsheet, it is time to make adjustments to your income and your savings goals.
Have a look, which income stream has seen an increase, and write that into your budget.
Also look for goals that will be fully saved up this year and only spread them over those many months, that they are needed.
If appropriate, set new goals or adjust the targets for different savings.
What if analysis
This is the time to dream about your budget and think about what life changes would impact it. Do you want to get married? Is your family growing? Do you think about moving or taking a sabbatical from work? Do you plan on going back to college?
Feel free to make copies of your page and move it into another spreadsheet document to do such what-if scenarios.
When to redo the budget entirely?
Life is not always predictable. When things change dramatically, then you should not wait until the end of the budget year to give your budget a make-over. You can either adjust the existing budget right away for the rest of the budget cycle or you can start a brand new budget.
However, if you are fiddling with your budget every month it could be a lack of discipline. Maybe your savings goals are not so clearly defined. Not that this is a problem. It is OK to simply save up for medium-term expenses without a concrete goal. Then you can buy on impulse if the medium-term budget line-item has the funding saved up.
The Pros and Cons of the minimal budget
The benefits to keep your personal budgeting minimal
There is a small but important list of benefits:
- You gain clarity on your financial goals
- You have a plan
- The effort is minimal
- You have peace of mind about money
- You don’t need to panic when things change in your life, just adjust the plan
The drawbacks of a minimal budget
- You need to be intuitively good with your money
- For most people it only works if you are earning a high income
- It does not give you much help if you need to reduce your expenses because you don’t itemize your expense categories
- Trends in expenses may go unnoticed. For example when you start buying more organic food it may go unnoticed for a while.
- If you are a couple making joint financial decisions, it can lead to miscommunication and distress.
- You have to be wary about any (new) subscription like commitment and how it affects your expenses.
If you determine the minimal budget is not for you, then you should look at a zero-based budget instead.
Give it a try
Budgeting is a vital pillar of building wealth. If it appeals to you, but you are afraid of the effort involved, give minimal budgeting a try.
All you need is a list of your:
- Income streams
- Savings goals with amount and target date
- The actual amounts for both
If you think you need a more fully-fledged budget, check out [[How to create a basic budget in 6 steps]]
Download the minimal budget template
A lot of the work in creating a budget is making the table and putting in the formulas. I made it easy for you by creating a temple for download.
Download the budget template as Excel spreadsheet
If you use Microsoft Excel as your spreadsheet software, you can download your Minimal Budget Template in Excel here.
Copy the budget template as Google Sheet
If Google Sheets is your preferred spreadsheet software, then you can make a copy for your Minimal Budget Template in Google Sheets here.
Please comment below for any feedback you may have or reach me on Twitter @SmarPerFinance, use the hash-tag #MinimalBudget