Most companies and businesses have a fiscal responsibility to balance their budget. They have to track their expenses on an annual basis and figure out where they will spend revenue. Then why is it most people don’t have a budget or focus on where they spend their own money?
Truth: They don’t understand the importance of a budget and how simple it is to start
The first year Megan and I were married, we adopted a budget to track where our dollars were coming in and going out. It is similar to a healthy eating plan to watch what you are eating: daily calories in and calories out. Obviously, you want to spend less then you are making. The whole point of a monthly budget is to see where your money is going and identify opportunities to save. This allows you to keep your spending in check and hold yourself accountable. A great way to save more money is to live below your means by keeping your monthly expenses consistent despite increases to your income. Our monthly expenses have remained the same amount since 2000 despite inflation and unexpected circumstances. We also have been able to save more by not increasing our spending as our income has grown.
Step 1: Understand How Much Money is Available
In order to develop a budget, you will start with a review of your paycheck(s) and determine the net amount. This figure is the actual take home amount after taxes, deductions, and social security/Medicare. Determine that number as total dollars available to use for the budget. It is important for you to have this as starting point. Should you have other income such as alimony/child support, rental property or other monthly revenue, be sure to include in your total amount of money to allocate.
Step 2: Figure Out all Your Monthly Bills
Collect each individual statement you have such as; rent/mortgage, utilities, lawncare, pests, cable, insurance, cell phones, vehicle payment, day care, and school tuition. These are your main expenses you know that will be there every month whether you like it or not. Next, if you keep receipts, gather what you spend weekly such as groceries, fuel, entertainment, recreational activities, dining out, pets, clothing, beauty, and household supplies. Do not forget coffee, cigarettes, alcohol, the salon, and any other categories you have spent money in. If you don’t have your most recent receipts, then you can start by saving receipts for every purchase you make weekly and do this exercise for an entire month. It can provide the details you need to calculate how much money is actually being spent. Place the receipts in a folder for each week and at the end of the week you will enter these figures into the budget. Once you gather all your statements and receipts you will have an idea of your spending for the month, then you can calculate a total for specific categories.
Step 3: Name the Categories
Your categories will depend on what you discovered when you gathered up your receipts. Sort the receipts and group them by category. Here are the main categories we use for our budget:
- Savings & Investments
- Gifts & Donations
- Personal Care
There are subcategories within the main categories. For example, in transportation we have:
- Vehicle payment(s)
- Parking & tolls
- Ride Sharing
- Car wash
Let’s take two very common categories and one that can become a large number for expenses: groceries and eating out. For dining out, don’t forget that trip to the coffee shop, lunches and dinners on the go or take-out and delivery items. These should be two separate budget line items since one can help decrease the other. If you buy more groceries and cook meals at home this will decrease your eating out totals dramatically.
These are just some suggestions and once budgeting becomes a regular habit, you can decide to revise, delete or add different categories depending on your lifestyle.
Step 4: Determine Yearly Totals
Now that you know what to call your expenses and have an idea of how much you spend per month (after gathering receipts and tracking your spending in specific areas). It is time to assign each category a dollar amount to stay under based on your income and the amount you spend in different categories.
Once you have monthly expenses tallied for each category, multiply that number by 12 months. This will equate a total of dollars spent for the year per category. First, see if this number is higher or lower than your total income. If the projected number is less than the money you make, you are better than most. However, if the number is higher it is an opportunity to find ways you can decrease your spending in.
Step 5: Enter in the Numbers
You can use something as simple as an excel spreadsheet or you can find many budget templates online. There are also many free apps available that make budgeting a breeze. A great resource is www.mint.com.
Set up the budget by entering in your yearly household total net income and the total estimated monthly amount per category. This gives you a baseline to work from and can help you see if improvements need to be made.
Then, each month add up the receipts by category and enter them in. After you have entered in the monthly totals by category into the budget you will want to file the receipts. Any easy way is to make folders with each store name. I have folders for the individual stores we shop at the most. With each purchase, I place the receipt in folder which makes it easier to find receipts when needed. This system will also begin a good habit to help you stay organized while tracking expenses.
Having a budget to help save money or remove debt is similar to having directions for the address you are driving to arrive somewhere. You have to know where you are going and a budget is the best tool to help you reach your goals when it comes to spending money. There are many options available to help you, but keep in mind that the best budget is the one that works for you and will become a regular life habit!