If you do a quick search for “how to create a budget” on Google, you get 912,000,000 hits. I definitely did not sift through all that information, and I doubt that you will, either. There are many different models that you can take when creating a budget, and many people like to have different formulas to come up with the perfect answer to their financial problems.
The real answer is that there is no one-size-fits-all solution for budgets except for this: you need to make one. How you decide to allocate your money depends on a few factors like the size of your household, the amount of income coming in, and what sort of financial situation you are in (do you have debt? Are you trying to save for a goal? Are you trying to trim the unnecessary things?). Whether rich or poor, single or a family, in debt or debt-free, a budget is essential in order for you to know where your money is going.
Many people think of a budget as a four-letter word. The very word sounds restrictive! However, a budget doesn’t have to be a negative thing. It is simply a way for you to know what your expenses are and what your income is. If the two don’t agree, it’s time to look at your life and see what you can adjust.
There are many free budgeting tools out there. I personally still use a pen and paper to write my budget out, but I also have a Mint.com account and use Microsoft Excel as other ways to see my finances laid out. All of these are viable ways to create a budget. There are also several apps that you can download (I hear Moneybook is a good tool!), but no matter how you do it, the basics are the same. Here is how I formulate my budget, and I hope that it helps you, too.
1- Gather all of your financial statements together. This means that you will need to get recent bank statements, credit card statements, bill statements such as utilities, insurance, cell phone, etc. (any bill you pay online you will need to print out, or at least have easy access to so that you can review it), rent/mortgage statements, loan statements and any other piece of paper or electronic notification that means that you owe someone else money. You will also want your most recent paystubs from your employer as well as records of any additional income streams that you may have (babysitting, freelance work, a part-time gig, etc).
2- Review your financial information with a fine-tooth comb. Look over all of your bill statements. Are you being charged for something that you shouldn’t? If so, you need to contact that company and dispute it. When it comes to bank statements and credit card statements, take the last two to three months and add up your spending in a few categories. I usually like to pick things like fast food, dining out, clothes, entertainment, groceries and bars/clubs, since these are usually my trouble categories. Looking at what you spend in these areas gives you an idea of what you are spending each month – and you should be able to look at it and know if you are being outrageous or not in each category.
3- List all of your financial obligations. This sounds seemingly easy, but it’s not. If you aren’t an organized person, it’s going to be even harder. You have your basic categories, like rent/mortgage payment, utilities, insurance, transportation costs, groceries, savings and entertainment. However, you also have other expenses that may not fall into these categories. Any sort of personal care, doctors’ visits, membership dues, cable bills, internet bills, veterinary bills/medicine, pet care, clothing costs, home improvement, home maintenance/repairs would all warrant their own category. Debt repayments all deserve their own lines in your budget as well. You also must consider any extracurricular activities (this is especially important if you have children, because any activity that they want to participate in will likely not be free!). Lastly, your savings categories should be broken down into more definite categories: retirement, emergency fund, house downpayment, next vacation, new car, etc. I like to organize mine by monthly debts and irregular debts, and these irregular debts I mark on the calendar so that they aren’t a surprise when the time comes and I can adjust that months’ budget accordingly (such as a yearly vet exam for my cat, or when I renew my Pandora subscription in October).
4- Compare your current expenses to your current income. How to they compare? Ideally, your expenses will be well below your income. Let’s face it, though – if you are making a budget for the first time, the chances are that your expenses vs. income margin is slim. If your expenses outweigh your income, then you have a problem. Where can you cut back? Do you need cable? Can you reduce your grocery bill? Can eliminate some unnecessary costs each month, like a haircut or a clothing budget? This is usually where a budget can seem very negative, because it seems like you are taking away all fun things. This doesn’t mean that you will never be able to do those things again, but it means that for now, you need to cool it and find more frugal ways to have fun (more on that in a later post!).
5- Write/type out your new goals. Some of your expenses will be fixed, meaning that they will not vary at all or will only very slightly from month-to-month. These are typically things like your mortgage/rent payment, car payments, car insurance, phone bill and loan repayments. The rest of your monthly expenses are variable, meaning that they will fluctuate from month to month or based on your lifestyle. This will include things like your utility bill, your grocery bill, fuel/public transportation costs, eating out money, entertainment, cable bills, gym memberships, etc. Aside from the utility, grocery, and transportation bills, the rest of those things are things that you can slash dramatically if you need/want to see a quick change in your budget. I like to write it out in columns, in order of importance from highest to lowest. An example:
When I write this out by hand, I usually have two columns – what I budgeted for and what I actually spent. Excel has some really neat templates that will do all the math for you, if you don’t mind entering a little bit of data. Mint.com will do it automatically, although I find that their categorizations aren’t always the best and need to be spot-checked every once in awhile for accuracy.
6- Track all of your spending for at least a month, but optimally two to three months. This is a pain in the butt, especially when it comes to cash purchases, but it lets you know exactly what you are doing with your money and WHY if you are overbudget for some reason. I like to jot my transactions down in a little notebook, but you can do it via a note-taking app or a transaction recorder on a smartphone if that is more appealing. The purpose of this part of the budgeting process is to enlighten you when it comes to where you are spending your money. By being aware of what you are spending and why (because I felt like it always seems like a terrible idea when it comes time to pay your credit card bill…), you can adjust your budget into something that is more workable. You might also discover that you are spending more in one category than you thought.
7- Compare your actual spending to your budget. How did you do? Were you able to stick with it? Was it too strict or too lenient? Where are the areas that you can trim even more from?
8- Make adjustments as necessary. If you have never made a budget, then likely your first attempt won’t be dead-nuts perfect. Some categories you may budget too much for, and some you may have budgeted too little. In some categories, I like to budget high to account for fluctuations in the seasons/market demand (such as utilities and fuel). This leaves me a little wiggle room – I know that my bill typically won’t be that high, but if it is, I’m prepared for it. When it comes to my grocery budget, however, I had to recently increase it since I am making an effort to eat better and am buying more food to consume at home instead of eat out.
Don’t be discouraged if you find out that your spending is not as disciplined if you want it to be. If you are a chronic spender, it might be scary to sit down and do your first budget. Don’t let that stop you! By reviewing your finances and making active decisions to change, you will be taking the first steps towards financial success.
What sort of budgeting methods do you prefer? Any must-have programs or apps to make life easier?