You might be surprised where you spend your money. I know I was!
Last week I told you about the evolution of my budget. In the past I’ve tried to follow a budget, only to fail time and time again. But I’ve learned from my mistakes. Today I’m going to walk you through the steps you need to take to make a budget that really works.
Step 1: Record Your Income and Expenses for a Month
If you’re really organized, you can look back at your expenses for six months to a year, but I’m going to assume you’re organizationally challenged like I am. :) For one month, you need to record every transaction that you make with your money. Carry a notebook. Save receipts. Write down where every penny goes.
The notebook and receipts are important. You want to be specific. It doesn’t help you to write down "Spent $40 at Target." Did you spend money on food? Towels? Electronics? You need to know these things.
If you’re adept at using spreadsheets, you can use a spreadsheet to categorize expenses. If you’re not, recording everything on a sheet of paper or in a Word document will be fine. The important thing is to record the information.
At the end of the month, if you’re like me, you will be surprised at how much money is leaking out of your bank account every month. The first month I recorded our expenses, we spent $300 on eating out. I’m not kidding. I was shocked.
We were also shocked at how much money we were using on little trips to the grocery store for snacks. We really had no idea.
At the end of the month, you will have a good idea of what your spending habits are. You’ll see the areas where you need to work on curtailing your spending, and you’ll notice areas where you could stand to put a little bit more money. You’re ready to move on to step 2.
Step 2: Write Down Income and Necessary Expenses
First write down how much net income you bring home every month. For now I’m going to assume you make a fixed amount every month. If you work on commission or some other irregular pay structure, stay tuned for Thursday’s post on budgeting with an irregular income.
Next list the things you know you need to pay over the course of a year. Dave Ramsey has an excellent form to help you with this. Use the information you collected during your 30 days of recording expenses to help you with this. For variable bills, such as your electric and water bills, write down the average amount over the course of 12 months.
Don’t forget expenses that come up every six months or only once a year. Insurance premiums and car registration renewal are two that come to mind. Divide the total amount by the term covered, and enter that into your monthly expenses. If you pay your insurance every 6 months, divide the premium by 6, and that’s the amount you’re going to save toward insurance every month.
Finally, subtract all of your expenses from your income.
Step 3: Adjust
If your income is greater than your expenses, that’s fantastic! Take any extra income and put it toward your financial goals. This could be your emergency fund, debt repayment, retirement…the possibilities are endless!
If you’re like most people, though, your expenses will be greater than your income, and you will come to the sinking realization that you’ve been spending more than you earn. Don’t be discouraged. You can fix this.
You now need to cut areas of your budget that are flexible. If you’re spending $300 on eating out, that’s a good place to start. The grocery bill is also very flexible. But be realistic. Don’t budget $85 a month for food for a family of four. It will never work.
If you are having trouble making your income cover your expenses, and you can’t cut expenses any further, you need to think about raising your income. Can you take on a second job? Babysit? Blog?
Also consider contacting your credit card companies to see if you can arrange a lower payment. Or consider Consumer Credit Counseling. Just know that you cannot continue to spend more than you earn. If you do, things will only get worse. Take whatever steps are necessary to get your spending level below your level of income.
Step 4: Live by Your Plan, but Don’t Be Too Rigid
Once you have a budget in place, follow it. If you have already spent the $100 you budgeted for eating out for the month, don’t spend anymore. This is easier said than done, of course. I’ve screwed up many times. However, by keeping the budget in mind when you spend, you will continually move closer to your goals.
If you find you are consistently off in a budget category, perhaps you need to re-evaluate the budget. As gas prices went up, my husband and I had to adjust our auto fuel category up about $100 a month.
A budget isn’t set in stone. You can adjust it if it’s not working for you. The important thing is to start planning where your money goes. If you don’t have a plan for your money, it will just disappear on meaningless items. By making a plan, you can ensure that you are doing what you can to achieve your financial goals. Without a plan, your goals are just dreams.
Don’t miss the other two parts in the series!
Is there anything else you’d like to see covered while I’m on the subject of budgeting? Leave a comment and let me know!
Photo by Dan4th.
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March 3rd, 2008 at 5:05 am
This is a great article! I have a budget that works for me, that I’ve been using since September 2006, and I created it using almost all of these steps. The only thing I did differently was to ‘backtrack’ our expenses- I created the categories by looking at our bank statements from the prior three months.
March 3rd, 2008 at 5:09 am
Lynnae,
Excellent easy information to use! I downloaded the form. I do self employment taxes each year, when you go through receipts it amazing how much you spend on junk food.
I look forward to your next article!
March 3rd, 2008 at 5:18 am
Good post, I found step 1 to be the hardest out of the whole list. Its extremely easy to not track some of the small expenses such as a can of coke. But if you keep adding these up they’ll really make a huge difference in the long run.
I also agree with step 4, you can’t be too rigid. If you’ve spent your alloted budget for eating out in the month and an old friend is in town and wants to go to dinner… this shouldn’t stop you. Sometimes life doesn’t play by the rules, it doesn’t know when you’ve spent your budget. You can’t be too rigid though you should follow it as closely as possible.
March 3rd, 2008 at 6:09 am
This is a great outline of starting a budget and #4 is so important! A lot people will set their budget up too strictly and the first time something doesn’t add up or they go overboard in one category they think they are a failure and give up entirely.
It’s important to look at your budget as a guide, you want to stick to it as best you can, but allow some wiggle room for the unexpected.
Take Care
LJ
March 3rd, 2008 at 11:46 am
You’re so right on step one. You have to track where the money went before you decide where it should go! I’m excited to see Friday’s post.
March 3rd, 2008 at 12:52 pm
great article!!!
I’m trying YNAB right now, but I do have all my reciepts from last month so I’ll probably do all this soon…I’m anticipating overspending in eating out for sure….man.
March 3rd, 2008 at 1:59 pm
“Live by your plan but don’t be too rigid.” That’s the best budget advice. Most people think of a budget as a choke hold on fun, but if you’re able to be just a little flexible in some categories and if you will budget for some entertainment and an occasional dinner out, you will stick to it. At least, that’s been my experience!
March 3rd, 2008 at 7:40 pm
Oooooh! This is a GREAT post! Over the last year I have slowly fallen out of using a structured budget and into just being the most frugal I can possibly be. Because I am single with no kids, all the money is up to me and I suppose that makes it easier for me, considering. But just last night I decided I wanted to keep track of how I was spending for a month, just to sort of check in on myself. I think I’ll do that for the entirety of March and reconvene in April
This is a great post, and just what I needed to read. I watched that The Story of Stuff video a couple of months ago (emailed to me from my dad - because he’s awesome :)) and I’m glad you liked it and found it inspiring. I am trying to take those principals into my frugality/simplicity challenge, which is to rid myself of crap and never buy it again. It’s uplifting to do so, so far
Happy Monday!
March 3rd, 2008 at 8:28 pm
I also struggle the most with #1. I carry a small notebook with me all the time but only remember to write in it about half the time. Its the small purchases that seem to slip through the crack and its really hard to remember them at the end of the day. I have found that using cash rather than my check card helps as I have to account for where the money went at the end of the day.
March 4th, 2008 at 8:47 am
This is such a good post and so needed! We didn’t use an actual budget for years and I thought we were doing pretty good.I just kind of kept a mental record (not a good idea) I was so surprised when we actually put it on paper and “told our money where to go” (per Dave Ramsey). It has made a tremendous difference in what we have been able to save and to pay on our debt. Also just the discipline of writing everything down will help you save money.
Thanks again!
March 5th, 2008 at 1:33 pm
That’s almost exactly how we did it!!
CindyS, one thing that helps is collecting all your receipts in a special place in your purse. Then emptying your purse and everyone else’s purses/wallets into a special basket every night. Then sort the basket once a week. If the receipt doesn’t have enough specifics, add some right when you make the purchase. That helped us.
March 12th, 2008 at 6:28 am
Great post. Since my wife and I started following a budget (rigorously!), it’s like someone loosened our belt: things don’t feel so tight anymore.
Another tip for your other readers is to buy groceries in bulk. We use a site called BulkHome.com. They have free shipping and no membership fees.
Properly planned (rigorously!), bulk shopping can save a lot of money each month.