Module 2: Income & Cash Flow Basics

Understanding What's Coming In and Where It's Going

Introduction

Welcome to Module 2! Now that you've clarified your financial goals and "why," it's time to get real about the numbers.

Here's a surprising fact: many people have no idea how much money they actually make (after taxes) or where it all goes each month. They're flying blind, wondering why there's never enough left over at the end of the month.

This module changes that. We're going to:

Understand your true take-home income
Track where your money actually goes
Identify spending patterns and potential leaks
Learn practical budgeting methods that work
Create a cash flow system that supports your goals

Think of this as turning on the lights in a dark room. You can't organize what you can't see. Let's illuminate your finances!

Part 1: Understanding Your Income

Gross vs. Net Income (And Why It Matters)

Let's start with a crucial distinction many people miss:

Gross Income: The total amount you earn before anything is taken out
Net Income (Take-Home Pay): What actually hits your bank account after deductions

Example:

Gross monthly income: $5,000
Taxes (federal, state, local): -$900
Social Security & Medicare: -$382
Health insurance: -$200
401(k) contribution: -$250
Net income: $3,268

That's a $1,732 difference! This is why you can't budget based on your gross income – you never see that money.

Common Deductions from Your Paycheck

Let's break down what typically comes out before you see your money:

Required Deductions:

Federal income tax: Based on your income level and tax bracket
State income tax: Varies by state (some states have none!)
Local taxes: City or county taxes in some areas
Social Security (FICA): 6.2% of your gross income (up to a cap)
Medicare: 1.45% of your gross income

Voluntary Deductions:

Health insurance premiums
Dental/vision insurance
Retirement contributions (401k, 403b)
HSA or FSA contributions
Life insurance
Union dues

Understanding these deductions helps you:

Know your real spending power
See where you might have flexibility (voluntary deductions)
Appreciate benefits you're already paying for

💡 Exercise 2.1: Calculate Your True Income

Grab your most recent pay stub. Let's figure out your real take-home pay.

If You're Paid Bi-Weekly or Weekly:

Pay period gross income: $_______________

Total deductions: -$_______________

Net pay (per paycheck): $_______________

Number of paychecks per year: _______________

Annual net income = Net pay × Number of paychecks

Annual net income: $_______________

Monthly average net income = Annual net income ÷ 12

Monthly average: $_______________

If You're Paid Monthly:

Monthly gross income: $_______________

Total deductions: -$_______________

Monthly net income: $_______________

If You Have Irregular Income (freelance, commission, seasonal work):

Average the last 6-12 months of net income if possible:

Month 1: $_____ Month 2: $_____ Month 3: $_____
Month 4: $_____ Month 5: $_____ Month 6: $_____

Total ÷ 6 = Average monthly net income: $_______________

Pro tip: If your income varies, budget based on your lowest-earning month and treat anything above that as a bonus to put toward goals.

Other Income Sources:

Do you have income from other sources? List them here:

Side hustle/freelance (monthly average): $_______________

Investment income (dividends, interest): $_______________

Rental income: $_______________

Other: : $

TOTAL MONTHLY NET INCOME: $_______________

This number is your financial foundation. Everything else we do builds from here.

Part 2: Where Does Your Money Go?

Most people dramatically underestimate their spending. "I don't know where it all goes" is one of the most common financial phrases for a reason.

The solution? Track your spending for at least one month. Ideally, track for 2-3 months to see patterns.

The Major Spending Categories

Let's organize spending into categories that make sense:

Fixed Expenses (same amount each month):

Rent/mortgage
Insurance (car, health, life)
Loan payments (car, student, personal)
Subscriptions (streaming, gym, etc.)
Phone bill
Internet

Variable Expenses (change month to month):

Groceries
Gas/transportation
Utilities (electric, water, gas)
Dining out/takeout
Entertainment
Personal care (haircuts, toiletries)
Clothing
Medical/pharmacy
Home maintenance
Pet expenses

Periodic Expenses (don't happen every month):

Car maintenance/repairs
Annual subscriptions
Gifts (birthdays, holidays)
Clothing
Medical (dentist, annual exams)
Car registration
Home repairs

Savings & Debt Payoff:

Emergency fund contribution
Retirement savings
Other savings goals
Extra debt payments (beyond minimums)

💡 Exercise 2.2: Track Your Spending

Option 1: The Quick Audit (Good for getting started)

Look back at the last 30 days in your bank account and credit card statements. Categorize your spending:

Category	Amount
Housing (rent/mortgage)	$______
Utilities	$______
Groceries	$______
Dining out/takeout	$______
Transportation (gas, car payment, etc.)	$______
Insurance	$______
Debt payments	$______
Phone/internet	$______
Subscriptions & memberships	$______
Entertainment	$______
Shopping (clothing, etc.)	$______
Personal care	$______
Healthcare	$______
Pets	$______
Other	$______
TOTAL SPENDING	$______

Option 2: The 30-Day Challenge (Best for accuracy)

Track every dollar for 30 days using one of these methods:

Method A: App-based

Apps like Mint, YNAB, EveryDollar, or PocketGuard
Connect your accounts for automatic tracking
Categorize transactions as they happen

Method B: Spreadsheet

Create columns: Date | Description | Category | Amount
Enter expenses daily (don't wait until end of month)
Use filters to see spending by category

Method C: Notebook

Carry a small notebook
Write down every purchase immediately
Tally by category at end of week

Method D: Receipt Envelope

Collect every receipt
Sort into category envelopes at end of each week
Add up totals

Pick the method that matches your lifestyle. The best tracking method is the one you'll actually use.

Part 3: The Spending Reality Check

After tracking for a month, let's analyze what you found.

💡 Exercise 2.3: Analyze Your Spending

1. The Income vs. Spending Reality

Monthly net income (from Exercise 2.1): $_______________

Total monthly spending (from Exercise 2.2): $_______________

Difference: $_______________

Is this number positive or negative?

Positive: You're spending less than you earn (great start!)
Negative: You're spending more than you earn (time to adjust)

2. The Category Breakdown

Look at your spending by category. Calculate what percentage each category is of your total spending:

Example:
If you spent $2,000 total and $600 went to groceries and dining out:
$600 ÷ $2,000 = 0.30 = 30% on food

Calculate your top 5 spending categories:

___: $ (%)
___: $ (%)
___: $ (%)
___: $ (%)
___: $ (%)

3. The Surprise Factor

What surprised you most about your spending?

Were there any "budget leaks" – small recurring expenses that add up?

Examples: Daily coffee ($150/month), unused subscriptions ($50/month), delivery fees ($80/month)

My budget leaks: _______________________________________________

Total monthly cost of leaks: $_______________

Annual cost: $_______________ × 12 = $_______________

4. The Values Check

Look at your top spending categories. Ask yourself:

Does this spending align with my values and goals (from Module 1)?

Am I spending money on what matters most to me?

What would I like to spend MORE on?

What would I like to spend LESS on?

Part 4: Budgeting Methods That Actually Work

Now that you know what you make and where it goes, let's talk about budgeting. Think of a budget not as a restriction, but as a plan for your money that helps you reach your goals.

Method #1: The 50/30/20 Rule

This is the simplest budgeting method and great for beginners.

50% - Needs (Essential expenses)

Housing
Utilities
Groceries
Transportation
Insurance
Minimum debt payments
Basic phone/internet

30% - Wants (Non-essential but enjoyable)

Dining out
Entertainment
Hobbies
Subscriptions (Netflix, Spotify, etc.)
Shopping
Travel
Non-essential upgrades

20% - Savings & Debt Payoff

Emergency fund
Retirement contributions
Other savings goals
Extra debt payments

Example with $3,500 monthly net income:

Needs: $1,750 (50%)
Wants: $1,050 (30%)
Savings/Debt: $700 (20%)

Pros: Simple, flexible, easy to remember
Cons: May not work if you live in a high-cost area or have significant debt

Method #2: Zero-Based Budget

Every dollar gets a job. Income minus expenses = zero.

How it works:

Start with your monthly net income
Assign every dollar to a category until you hit zero
You're not necessarily spending it all – savings/investments count as categories

Example with $3,500 monthly net income:

Category	Amount
Rent	$1,200
Utilities	$150
Groceries	$400
Transportation	$300
Insurance	$250
Phone	$80
Dining out	$200
Entertainment	$150
Subscriptions	$50
Emergency fund	$300
Retirement	$250
Fun money	$170
TOTAL	$3,500

Remaining: $0

Pros: Very intentional, detailed control, maximizes every dollar
Cons: Takes more time, requires regular adjustment

Method #3: Pay Yourself First

Prioritize savings and goals, then spend what's left.

How it works:

As soon as you get paid, automatically move money to:
- Emergency fund
- Retirement accounts
- Other savings goals
- Extra debt payments
Live on what remains

Example with $3,500 monthly net income:

First: Savings & Goals (20% = $700)

Emergency fund: $300
Retirement (401k/IRA): $300
Vacation fund: $100

Then: Fixed Expenses (~$2,000)

All bills and essential spending

Finally: Everything Else (~$800)

Flexible spending on wants

Pros: Guarantees you prioritize goals, simple to automate
Cons: Requires discipline not to dip into savings, may feel restrictive at first

Method #4: Envelope System (Cash-Based)

Use physical cash for spending categories to prevent overspending.

How it works:

Decide your spending limit for variable categories (groceries, dining out, gas, etc.)
Withdraw cash and put it in labeled envelopes
When the envelope is empty, you're done spending in that category
Pay fixed bills normally (online/check)

Example:

Groceries envelope: $400
Dining out envelope: $150
Gas envelope: $200
Fun money envelope: $100

Pros: Very visual, prevents overspending, helps curb impulse purchases
Cons: Inconvenient in a digital world, doesn't work for online shopping, need to withdraw cash regularly

Method #5: Reverse Budget (Anti-Budget)

Track only what matters: your savings rate and your big essentials.

How it works:

Set up automatic transfers for savings/investing
Pay your essential bills
Spend whatever's left guilt-free
Track nothing else

Pros: Least restrictive, great if you're naturally frugal, low mental load
Cons: Can lead to lifestyle inflation, doesn't work if you overspend, less awareness of spending patterns

💡 Exercise 2.4: Choose Your Budgeting Method

Based on what you've learned, which method appeals to you most?

My preferred method: _______________________________________________

Why this one?

Now let's try it out:

Use the template below to create your first budget using your chosen method.

💡 Exercise 2.5: Create Your Budget

Your Monthly Net Income: $_______________

Now allocate it based on your chosen method:

If using 50/30/20:

Needs (50%): $_______________

List your essential expenses:

_________: $
_________: $
_________: $
_________: $

Wants (30%): $_______________

List your non-essential spending:

_________: $
_________: $
_________: $

Savings & Debt (20%): $_______________

Allocate to:

_________: $
_________: $

If using Zero-Based Budget:

List every category until you reach zero:

Category	Budgeted Amount
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
TOTAL	$______

Does it equal your income? If not, adjust until it does.

If using Pay Yourself First:

Step 1 - Savings/Goals First:

Emergency fund: $______
Retirement: $______
Other savings: $______
Extra debt payment: $______
Total saved: $______

Step 2 - Fixed Expenses:

List your bills: $_______

Step 3 - Remaining for Flexible Spending: $______

Part 5: Making Your Budget Work

Creating a budget is step one. Sticking to it is the real challenge. Here are strategies that help:

Strategy #1: Automate Everything Possible

Auto-pay bills to avoid late fees
Auto-transfer to savings on payday
Auto-invest for retirement
Keep "spending money" in a separate checking account

Why it works: You can't forget or talk yourself out of what's automatic.

Strategy #2: Use the Right Tools

For tracking: Mint, YNAB (You Need A Budget), EveryDollar, PocketGuard
For banking: Online banks with multiple savings accounts (Ally, Marcus, Capital One 360)
For visualizing: Spreadsheets, apps, even pen and paper

Pick tools that match your tech comfort level.

Strategy #3: Do Weekly Money Check-Ins

Spend 15 minutes once a week:

Review what you spent
Check if you're on track with your budget
Adjust upcoming spending if needed
Celebrate wins

Schedule it: Pick a specific day/time (Sunday evening, Friday morning, etc.)

Strategy #4: Build in Flexibility

Life happens. Your budget should have:

A "miscellaneous" category for unexpected small expenses
Some discretionary "fun money" you don't have to track
Room to adjust when plans change

Rigid budgets break. Flexible budgets bend.

Strategy #5: Plan for Irregular Expenses

Don't let annual or quarterly expenses derail you.

Step 1: List irregular expenses and their annual cost

Example:

Car insurance (paid annually): $1,200
Amazon Prime: $139
Car registration: $180
Holiday gifts: $600
Total annual irregular expenses: $2,119

Step 2: Divide by 12 to get monthly amount to set aside

$2,119 ÷ 12 = $177/month

Step 3: Save that amount monthly in a separate account

When the bill comes, you're ready!

💡 Exercise 2.6: Plan for Irregular Expenses

List your irregular/annual expenses:

Expense	Annual Cost	Monthly Set-Aside
_____________	$______	$______
_____________	$______	$______
_____________	$______	$______
_____________	$______	$______
_____________	$______	$______
TOTAL	$______	$______

Add this monthly set-aside amount to your budget as a "sinking fund" category.

Part 6: When Your Budget Doesn't Balance

What if your essential expenses exceed your income? Or there's nothing left for savings?

If Expenses > Income:

You have three options:

1. Increase income

Ask for a raise
Start a side hustle
Sell items you don't need
Take on extra shifts

2. Decrease expenses

Review all subscriptions – cancel what you don't use
Shop for better insurance rates
Reduce variable expenses (meal prep instead of takeout)
Consider roommates or moving to lower cost housing
Refinance high-interest debt

3. Combination of both

Usually the most effective approach

Prioritization When Money Is Tight

If you can't cover everything, here's the priority order:

Priority 1: The Four Walls

Food (groceries, not dining out)
Shelter (rent/mortgage)
Utilities (basic electric, water, heat)
Transportation (gas to get to work)

Priority 2: Legal Obligations 5. Child support/alimony 6. Taxes owed 7. Court-ordered payments

Priority 3: Other Essentials 8. Health insurance and critical medications 9. Car payment (if needed for work) 10. Minimum debt payments

Priority 4: Everything Else 11. Other bills and expenses 12. Savings goals

If you can't cover Priorities 1-3, you need immediate help. Reach out to:

Local assistance programs
Religious organizations
Family/friends
Credit counseling services (non-profit)

Common Mistakes to Avoid

❌ Being too restrictive
→ Allow some fun money or you'll burn out
❌ Forgetting irregular expenses
→ These will derail your budget if you don't plan ahead
❌ Not tracking actual vs. budgeted
→ A budget is a living document; adjust it based on reality
❌ Giving up after one bad month
→ Budgeting is a skill. You'll get better with practice.
❌ Budgeting gross income instead of net
→ Always budget based on take-home pay
❌ Making it too complicated
→ Simple budgets you'll stick to beat perfect budgets you'll abandon
❌ Not communicating with your partner
→ If you share finances, you must budget together

Key Takeaways

✅ Your net income (take-home pay) is what matters for budgeting, not your gross income
✅ Tracking your spending reveals patterns, leaks, and opportunities
✅ Different budgeting methods work for different people – choose what fits your style
✅ Automate savings and bills whenever possible
✅ Plan for irregular expenses by setting aside money monthly
✅ A budget should be flexible enough to handle real life
✅ Weekly check-ins keep you on track without becoming overwhelming
✅ When money is tight, prioritize the four walls first

Quick Wins You Can Do Right Now

Set up automatic transfers to your savings account on payday – even if it's just $25
Cancel one unused subscription right now (check your bank statements for recurring charges you forgot about)
Set a calendar reminder for your weekly 15-minute money check-in
Choose your budgeting tool/method and set it up today
Start tracking – download an app or create a simple spreadsheet

Before You Move to Module 3

Make sure you've completed:

✓ Exercise 2.1: Calculated your true monthly net income
✓ Exercise 2.2: Tracked or audited your spending
✓ Exercise 2.3: Analyzed your spending patterns
✓ Exercise 2.5: Created your first budget
✓ Exercise 2.6: Planned for irregular expenses

Reflection Questions

How does it feel to have clarity about your income and spending?

What's one spending category you want to reduce?

What's one thing you want to spend MORE money on intentionally?

Looking Ahead

In Module 3, we'll talk about banking and financial accounts – where to keep your money, how to choose the right accounts, and tools to make managing money easier.

You've done the hard work of facing your numbers. Everything from here builds on this foundation!

Additional Resources

Budgeting Apps:

Mint (free, automatic tracking)
YNAB / You Need A Budget (subscription, zero-based method)
EveryDollar (free version available)
PocketGuard (free version available)

Spreadsheet Templates:

Search "budget spreadsheet template" for free Google Sheets or Excel options
Many banks offer free budget templates

Further Reading:

"The Total Money Makeover" by Dave Ramsey (envelope system, debt snowball)
"All Your Worth" by Elizabeth Warren (50/30/20 rule)

"A budget is telling your money where to go instead of wondering where it went." – Dave Ramsey

"You must gain control over your money or the lack of it will forever control you." – Dave Ramsey

Module 2: Income & Cash Flow Basics

Understanding What's Coming In and Where It's Going

Introduction

Welcome to Module 2! Now that you've clarified your financial goals and "why," it's time to get real about the numbers.

This module changes that. We're going to:

Understand your true take-home income
Track where your money actually goes
Identify spending patterns and potential leaks
Learn practical budgeting methods that work
Create a cash flow system that supports your goals

Think of this as turning on the lights in a dark room. You can't organize what you can't see. Let's illuminate your finances!

Part 1: Understanding Your Income

Gross vs. Net Income (And Why It Matters)

Let's start with a crucial distinction many people miss:

Gross Income: The total amount you earn before anything is taken out
Net Income (Take-Home Pay): What actually hits your bank account after deductions

Example:

Gross monthly income: $5,000
Taxes (federal, state, local): -$900
Social Security & Medicare: -$382
Health insurance: -$200
401(k) contribution: -$250
Net income: $3,268

That's a $1,732 difference! This is why you can't budget based on your gross income – you never see that money.

Common Deductions from Your Paycheck

Let's break down what typically comes out before you see your money:

Required Deductions:

Federal income tax: Based on your income level and tax bracket
State income tax: Varies by state (some states have none!)
Local taxes: City or county taxes in some areas
Social Security (FICA): 6.2% of your gross income (up to a cap)
Medicare: 1.45% of your gross income

Voluntary Deductions:

Health insurance premiums
Dental/vision insurance
Retirement contributions (401k, 403b)
HSA or FSA contributions
Life insurance
Union dues

Understanding these deductions helps you:

Know your real spending power
See where you might have flexibility (voluntary deductions)
Appreciate benefits you're already paying for

💡 Exercise 2.1: Calculate Your True Income

Grab your most recent pay stub. Let's figure out your real take-home pay.

If You're Paid Bi-Weekly or Weekly:

Pay period gross income: $_______________

Total deductions: -$_______________

Net pay (per paycheck): $_______________

Number of paychecks per year: _______________

Annual net income = Net pay × Number of paychecks

Annual net income: $_______________

Monthly average net income = Annual net income ÷ 12

Monthly average: $_______________

If You're Paid Monthly:

Monthly gross income: $_______________

Total deductions: -$_______________

Monthly net income: $_______________

If You Have Irregular Income (freelance, commission, seasonal work):

Average the last 6-12 months of net income if possible:

Month 1: $_____ Month 2: $_____ Month 3: $_____
Month 4: $_____ Month 5: $_____ Month 6: $_____

Total ÷ 6 = Average monthly net income: $_______________

Pro tip: If your income varies, budget based on your lowest-earning month and treat anything above that as a bonus to put toward goals.

Other Income Sources:

Do you have income from other sources? List them here:

Side hustle/freelance (monthly average): $_______________

Investment income (dividends, interest): $_______________

Rental income: $_______________

Other: : $

TOTAL MONTHLY NET INCOME: $_______________

This number is your financial foundation. Everything else we do builds from here.

Part 2: Where Does Your Money Go?

Most people dramatically underestimate their spending. "I don't know where it all goes" is one of the most common financial phrases for a reason.

The solution? Track your spending for at least one month. Ideally, track for 2-3 months to see patterns.

The Major Spending Categories

Let's organize spending into categories that make sense:

Fixed Expenses (same amount each month):

Rent/mortgage
Insurance (car, health, life)
Loan payments (car, student, personal)
Subscriptions (streaming, gym, etc.)
Phone bill
Internet

Variable Expenses (change month to month):

Groceries
Gas/transportation
Utilities (electric, water, gas)
Dining out/takeout
Entertainment
Personal care (haircuts, toiletries)
Clothing
Medical/pharmacy
Home maintenance
Pet expenses

Periodic Expenses (don't happen every month):

Car maintenance/repairs
Annual subscriptions
Gifts (birthdays, holidays)
Clothing
Medical (dentist, annual exams)
Car registration
Home repairs

Savings & Debt Payoff:

Emergency fund contribution
Retirement savings
Other savings goals
Extra debt payments (beyond minimums)

💡 Exercise 2.2: Track Your Spending

Option 1: The Quick Audit (Good for getting started)

Look back at the last 30 days in your bank account and credit card statements. Categorize your spending:

Category	Amount
Housing (rent/mortgage)	$______
Utilities	$______
Groceries	$______
Dining out/takeout	$______
Transportation (gas, car payment, etc.)	$______
Insurance	$______
Debt payments	$______
Phone/internet	$______
Subscriptions & memberships	$______
Entertainment	$______
Shopping (clothing, etc.)	$______
Personal care	$______
Healthcare	$______
Pets	$______
Other	$______
TOTAL SPENDING	$______

Option 2: The 30-Day Challenge (Best for accuracy)

Track every dollar for 30 days using one of these methods:

Method A: App-based

Apps like Mint, YNAB, EveryDollar, or PocketGuard
Connect your accounts for automatic tracking
Categorize transactions as they happen

Method B: Spreadsheet

Create columns: Date | Description | Category | Amount
Enter expenses daily (don't wait until end of month)
Use filters to see spending by category

Method C: Notebook

Carry a small notebook
Write down every purchase immediately
Tally by category at end of week

Method D: Receipt Envelope

Collect every receipt
Sort into category envelopes at end of each week
Add up totals

Pick the method that matches your lifestyle. The best tracking method is the one you'll actually use.

Part 3: The Spending Reality Check

After tracking for a month, let's analyze what you found.

💡 Exercise 2.3: Analyze Your Spending

1. The Income vs. Spending Reality

Monthly net income (from Exercise 2.1): $_______________

Total monthly spending (from Exercise 2.2): $_______________

Difference: $_______________

Is this number positive or negative?

Positive: You're spending less than you earn (great start!)
Negative: You're spending more than you earn (time to adjust)

2. The Category Breakdown

Look at your spending by category. Calculate what percentage each category is of your total spending:

Example:
If you spent $2,000 total and $600 went to groceries and dining out:
$600 ÷ $2,000 = 0.30 = 30% on food

Calculate your top 5 spending categories:

___: $ (%)
___: $ (%)
___: $ (%)
___: $ (%)
___: $ (%)

3. The Surprise Factor

What surprised you most about your spending?

Were there any "budget leaks" – small recurring expenses that add up?

Examples: Daily coffee ($150/month), unused subscriptions ($50/month), delivery fees ($80/month)

My budget leaks: _______________________________________________

Total monthly cost of leaks: $_______________

Annual cost: $_______________ × 12 = $_______________

4. The Values Check

Look at your top spending categories. Ask yourself:

Does this spending align with my values and goals (from Module 1)?

Am I spending money on what matters most to me?

What would I like to spend MORE on?

What would I like to spend LESS on?

Part 4: Budgeting Methods That Actually Work

Now that you know what you make and where it goes, let's talk about budgeting. Think of a budget not as a restriction, but as a plan for your money that helps you reach your goals.

Method #1: The 50/30/20 Rule

This is the simplest budgeting method and great for beginners.

50% - Needs (Essential expenses)

Housing
Utilities
Groceries
Transportation
Insurance
Minimum debt payments
Basic phone/internet

30% - Wants (Non-essential but enjoyable)

Dining out
Entertainment
Hobbies
Subscriptions (Netflix, Spotify, etc.)
Shopping
Travel
Non-essential upgrades

20% - Savings & Debt Payoff

Emergency fund
Retirement contributions
Other savings goals
Extra debt payments

Example with $3,500 monthly net income:

Needs: $1,750 (50%)
Wants: $1,050 (30%)
Savings/Debt: $700 (20%)

Pros: Simple, flexible, easy to remember
Cons: May not work if you live in a high-cost area or have significant debt

Method #2: Zero-Based Budget

Every dollar gets a job. Income minus expenses = zero.

How it works:

Start with your monthly net income
Assign every dollar to a category until you hit zero
You're not necessarily spending it all – savings/investments count as categories

Example with $3,500 monthly net income:

Category	Amount
Rent	$1,200
Utilities	$150
Groceries	$400
Transportation	$300
Insurance	$250
Phone	$80
Dining out	$200
Entertainment	$150
Subscriptions	$50
Emergency fund	$300
Retirement	$250
Fun money	$170
TOTAL	$3,500

Remaining: $0

Pros: Very intentional, detailed control, maximizes every dollar
Cons: Takes more time, requires regular adjustment

Method #3: Pay Yourself First

Prioritize savings and goals, then spend what's left.

How it works:

As soon as you get paid, automatically move money to:
- Emergency fund
- Retirement accounts
- Other savings goals
- Extra debt payments
Live on what remains

Example with $3,500 monthly net income:

First: Savings & Goals (20% = $700)

Emergency fund: $300
Retirement (401k/IRA): $300
Vacation fund: $100

Then: Fixed Expenses (~$2,000)

All bills and essential spending

Finally: Everything Else (~$800)

Flexible spending on wants

Pros: Guarantees you prioritize goals, simple to automate
Cons: Requires discipline not to dip into savings, may feel restrictive at first

Method #4: Envelope System (Cash-Based)

Use physical cash for spending categories to prevent overspending.

How it works:

Decide your spending limit for variable categories (groceries, dining out, gas, etc.)
Withdraw cash and put it in labeled envelopes
When the envelope is empty, you're done spending in that category
Pay fixed bills normally (online/check)

Example:

Groceries envelope: $400
Dining out envelope: $150
Gas envelope: $200
Fun money envelope: $100

Pros: Very visual, prevents overspending, helps curb impulse purchases
Cons: Inconvenient in a digital world, doesn't work for online shopping, need to withdraw cash regularly

Method #5: Reverse Budget (Anti-Budget)

Track only what matters: your savings rate and your big essentials.

How it works:

Set up automatic transfers for savings/investing
Pay your essential bills
Spend whatever's left guilt-free
Track nothing else

Pros: Least restrictive, great if you're naturally frugal, low mental load
Cons: Can lead to lifestyle inflation, doesn't work if you overspend, less awareness of spending patterns

💡 Exercise 2.4: Choose Your Budgeting Method

Based on what you've learned, which method appeals to you most?

My preferred method: _______________________________________________

Why this one?

Now let's try it out:

Use the template below to create your first budget using your chosen method.

💡 Exercise 2.5: Create Your Budget

Your Monthly Net Income: $_______________

Now allocate it based on your chosen method:

If using 50/30/20:

Needs (50%): $_______________

List your essential expenses:

_________: $
_________: $
_________: $
_________: $

Wants (30%): $_______________

List your non-essential spending:

_________: $
_________: $
_________: $

Savings & Debt (20%): $_______________

Allocate to:

_________: $
_________: $

If using Zero-Based Budget:

List every category until you reach zero:

Category	Budgeted Amount
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
_________________	$______
TOTAL	$______

Does it equal your income? If not, adjust until it does.

If using Pay Yourself First:

Step 1 - Savings/Goals First:

Emergency fund: $______
Retirement: $______
Other savings: $______
Extra debt payment: $______
Total saved: $______

Step 2 - Fixed Expenses:

List your bills: $_______

Step 3 - Remaining for Flexible Spending: $______

Part 5: Making Your Budget Work

Creating a budget is step one. Sticking to it is the real challenge. Here are strategies that help:

Strategy #1: Automate Everything Possible

Auto-pay bills to avoid late fees
Auto-transfer to savings on payday
Auto-invest for retirement
Keep "spending money" in a separate checking account

Why it works: You can't forget or talk yourself out of what's automatic.

Strategy #2: Use the Right Tools

Pick tools that match your tech comfort level.

Strategy #3: Do Weekly Money Check-Ins

Spend 15 minutes once a week:

Review what you spent
Check if you're on track with your budget
Adjust upcoming spending if needed
Celebrate wins

Schedule it: Pick a specific day/time (Sunday evening, Friday morning, etc.)

Strategy #4: Build in Flexibility

Life happens. Your budget should have:

A "miscellaneous" category for unexpected small expenses
Some discretionary "fun money" you don't have to track
Room to adjust when plans change

Rigid budgets break. Flexible budgets bend.

Strategy #5: Plan for Irregular Expenses

Don't let annual or quarterly expenses derail you.

Step 1: List irregular expenses and their annual cost

Example:

Car insurance (paid annually): $1,200
Amazon Prime: $139
Car registration: $180
Holiday gifts: $600
Total annual irregular expenses: $2,119

Step 2: Divide by 12 to get monthly amount to set aside

$2,119 ÷ 12 = $177/month

Step 3: Save that amount monthly in a separate account

When the bill comes, you're ready!

💡 Exercise 2.6: Plan for Irregular Expenses

List your irregular/annual expenses:

Expense	Annual Cost	Monthly Set-Aside
_____________	$______	$______
_____________	$______	$______
_____________	$______	$______
_____________	$______	$______
_____________	$______	$______
TOTAL	$______	$______

Add this monthly set-aside amount to your budget as a "sinking fund" category.

Part 6: When Your Budget Doesn't Balance

What if your essential expenses exceed your income? Or there's nothing left for savings?

If Expenses > Income:

You have three options:

1. Increase income

Ask for a raise
Start a side hustle
Sell items you don't need
Take on extra shifts

2. Decrease expenses

Review all subscriptions – cancel what you don't use
Shop for better insurance rates
Reduce variable expenses (meal prep instead of takeout)
Consider roommates or moving to lower cost housing
Refinance high-interest debt

3. Combination of both

Usually the most effective approach

Prioritization When Money Is Tight

If you can't cover everything, here's the priority order:

Priority 1: The Four Walls

Food (groceries, not dining out)
Shelter (rent/mortgage)
Utilities (basic electric, water, heat)
Transportation (gas to get to work)

Priority 2: Legal Obligations 5. Child support/alimony 6. Taxes owed 7. Court-ordered payments

Priority 3: Other Essentials 8. Health insurance and critical medications 9. Car payment (if needed for work) 10. Minimum debt payments

Priority 4: Everything Else 11. Other bills and expenses 12. Savings goals

If you can't cover Priorities 1-3, you need immediate help. Reach out to:

Local assistance programs
Religious organizations
Family/friends
Credit counseling services (non-profit)

Common Mistakes to Avoid

❌ Being too restrictive
→ Allow some fun money or you'll burn out
❌ Forgetting irregular expenses
→ These will derail your budget if you don't plan ahead
❌ Not tracking actual vs. budgeted
→ A budget is a living document; adjust it based on reality
❌ Giving up after one bad month
→ Budgeting is a skill. You'll get better with practice.
❌ Budgeting gross income instead of net
→ Always budget based on take-home pay
❌ Making it too complicated
→ Simple budgets you'll stick to beat perfect budgets you'll abandon
❌ Not communicating with your partner
→ If you share finances, you must budget together

Key Takeaways

✅ Your net income (take-home pay) is what matters for budgeting, not your gross income
✅ Tracking your spending reveals patterns, leaks, and opportunities
✅ Different budgeting methods work for different people – choose what fits your style
✅ Automate savings and bills whenever possible
✅ Plan for irregular expenses by setting aside money monthly
✅ A budget should be flexible enough to handle real life
✅ Weekly check-ins keep you on track without becoming overwhelming
✅ When money is tight, prioritize the four walls first

Quick Wins You Can Do Right Now

Set up automatic transfers to your savings account on payday – even if it's just $25
Cancel one unused subscription right now (check your bank statements for recurring charges you forgot about)
Set a calendar reminder for your weekly 15-minute money check-in
Choose your budgeting tool/method and set it up today
Start tracking – download an app or create a simple spreadsheet

Before You Move to Module 3

Make sure you've completed:

✓ Exercise 2.1: Calculated your true monthly net income
✓ Exercise 2.2: Tracked or audited your spending
✓ Exercise 2.3: Analyzed your spending patterns
✓ Exercise 2.5: Created your first budget
✓ Exercise 2.6: Planned for irregular expenses

Reflection Questions

How does it feel to have clarity about your income and spending?

What's one spending category you want to reduce?

What's one thing you want to spend MORE money on intentionally?

Looking Ahead

In Module 3, we'll talk about banking and financial accounts – where to keep your money, how to choose the right accounts, and tools to make managing money easier.

You've done the hard work of facing your numbers. Everything from here builds on this foundation!

Additional Resources

Budgeting Apps:

Mint (free, automatic tracking)
YNAB / You Need A Budget (subscription, zero-based method)
EveryDollar (free version available)
PocketGuard (free version available)

Spreadsheet Templates:

Search "budget spreadsheet template" for free Google Sheets or Excel options
Many banks offer free budget templates

Further Reading:

"The Total Money Makeover" by Dave Ramsey (envelope system, debt snowball)
"All Your Worth" by Elizabeth Warren (50/30/20 rule)

"A budget is telling your money where to go instead of wondering where it went." – Dave Ramsey

"You must gain control over your money or the lack of it will forever control you." – Dave Ramsey