Last week’s post was on why it’s so important to have a budget. If you missed it, stop reading this post and click over to here so that you can be fully in the know on that. It will definitely help this post make more sense. Promise. Go now.
In an attempt to be thorough, this post became a little longer than most of my posts. Grab the popcorn before you start!
The word budget can be daunting for many, though it certainly doesn’t need to be! On the other hand, the word discipline – what you need in order to stick to your budget – can be quite the unpleasant word. At least for me. But thankfully this post is mostly about creating a budget, not about discipline. Just keep in mind that a budget is about 10% math, 80% discipline, and 10% ritual. Once your math is complete, you need the discipline to stick to your budget, and you’ll need to create a ritual of looking at your account regularly – even daily – and tracking your expenses, month after month. But it will add up to a healthy financial state, making the math, discipline, and repetition totally worth it!
Gathering items to get started:
1. Your most current bank and credit card statements (log of expenses of the last month)
2. A pen and paper (we’ll talk about non-paper budgets another time)
Tip: start with paper for now to get yourself going with keeping a budget. A digital budget will speed things up later, but for now it’s probably overwhelming if you don’t already have a budget, due to all the possibilities!
3. Your calendar of the next month or so
Putting together your budget:
1. Know your income and outgo from last month.
2. Take your entire month’s spending and start categorizing each item: your Geico insurance payment would go under auto; your Chick-fil-A expense would go under restaurants, etc. (Some are not as obvious so use your discretion on those.)
3. After you categorize your expenses, begin adding up how much you spent in the last month for each category.
4. Compare your expenses with your income.
5. Determine your priorities and how much you want to save and/or how much you need to throw at your debt each month.
6. Determine what needs to be cut. If your outgo is more than your income (and it likely is!), you must make cuts; otherwise, you will go into debt (or more debt). Also if there’s no room for you to save any money, you definitely must make cuts.
Note: you might have to play with the numbers a bit! If you’re not accustomed to sticking to a budget, you may find yourself having to make some cuts that you never thought about before (like cable…or even Netflix! Yeah, I said it), but for the sake of meeting your savings or debt elimination goals, make the cuts!
7. Begin building out your budget by category. Here are some basic budget categories to get started with (this is only a basic starting point; be sure to include all your own expenses):
- Housing (basics like mortgage and utilities)
- Debt elimination
- Transportation (gas, insurance, registration)
- Clothing (not talking about wants but needs)
- Discretionary (entertainment, travel, gifts, date night, restaurants, general wants)
8. Take a look at your calendar to see if there are any upcoming events that will require extra money. (If it’s a special friend’s birthday, you may need to budget extra into your gifting category; if your car registration is almost up, budget extra money into auto, etc.)
9. For the items that are discretionary and/or fluctuate, assign those items a realistic amount to be spent.
10. Input your finalized, budgeted amounts into their appropriate categories.
When you’re done with this process, you should be able to look at your paper to see where all your money is going. Next week we will talk about how to keep up with your money, but for now, you can rest easy, knowing that you are in control of where your money is going.
Photo credit: Aaron Burden