Maybe you’ve been putting it off. Maybe it didn’t occur to you that you needed a budget. Maybe you just feel like you don’t have the time. Well now’s the time. If you want to have any idea of where your money is going you need a budget. You can’t effectively save or cut back if you don’t know what you’re spending. It doesn’t have to be complicated. You don’t even have to do any math if you can make a spreadsheet (or use mine, see below). It’s not necessary to be a computer whiz to make this spreadsheet either. It’s dead simple, but it takes a bit of your time and it will really make a difference.
Tracking Your Money – Step One
My husband and I once took a financial fitness class some years ago, and one of the first things we had to do for homework was track all of our money for a week. We had a worksheet to record every purchase, every payment, and every bit of income. It was very enlightening, and some of our classmates were very surprised at how much those little purchases just add up. You can do this activity pretty easily by taking a piece of paper, folding it in half, and recording money out on one side and money in on the other. Add those columns up and see whether your money out or money in is higher. Hopefully the money in! Alternately you can use a service like Mint if you don’t generally make any purchases with cash.
Another technique is to go back through your bank statements, and categorize and add up all your purchases. Use colored highlighters if you want, or different colored pens, or just write it out on paper as you add it up. It’s best to use your most recent statements for an accurate picture. Each monthly bill is its own category, groceries are a category, paying for auto gas is a category, etc. I generally lump all non-essential purchases into one “shopping” category. Again, if you want to use something like Mint this will be much easier. You do have to provide your account information, and it does add a little bit of a security risk, but frankly I find more risk in using my debit card at the gas station than providing my online account details to a reputable website. Some banks offer an option to export your recent purchases into a spreadsheet or file as well, which can make this process easier to do on a computer instead.
The Budget – Step Two
Done with the first step? Come on, go back and do it. How will you know how much you can budget for groceries if you don’t know how much you spend each month? If you budget in $400 for groceries, but are currently spending $600, you’re going to have a real tough time cutting back that much.
The first step to creating a budget is writing out a list of all the expenses every month. Remember those categories that you worked out in step one? These are what you will be working with. I like to break mine into 2 sections, but it’s not really necessary. I put all essential bills in one section, and purchases/variable expenses like groceries in another. This is also a good time to decide what things can go. Having a budget for our family allowed us to easily decide that when things got really tough we could do without Netflix for a while.
Once you’ve made your list, now you need to add some numbers. Use the information you got from step one to determine how much you should be spending per month on each category. Fixed bills like rent will be easy. Stuff like how much you spend to fill up the car with gas will be a bit tougher. Use your best judgement. I generally overestimate with these just a touch.
If you want a really accurate way of determining how much to budget your variable expenses, take an average of all the expenses. For example, add up all your grocery costs for last two months. Divide that number by 2, and that’s your average monthly cost. Do that for the last 3 months, and divide it by 3 instead. The further back you go, the better picture for your average costs you’ll get.
USDA Food Plans – This is a great place to get an idea of what others spend on groceries each month, and how much you can reasonably reduce your costs. Keep in mind that different regions have different prices in the stores, but it’s a good place to start. How do your actual costs compare with the USDA’s list?
Making It Easier
Remember those spreadsheets I was referring to? You just need 3 columns (or 2 if you don’t split your expenses into two groups like I do) and a section to balance everything out. Your fixed bills will be one column, your variable expenses will be another, and your income will be the third. The advantage to the spreadsheet is that you can easily plug in new numbers when things change, and it adjusts all the math for you. You can make it as basic, or as fancy as you want.
Even better, you can use the one that I pulled together below. It’s very basic, and will need to be adjusted if you have a large number of expenses to list. However, it should work nicely for many households, and is a great starting point to see how a basic budget works.
- Google Drive – You won’t be able to edit this document, but if you click on “File” and then “Make a Copy” You will have your own version to edit and play with. Go on plug in some numbers!
- Download for Microsoft Excel or Open Office or Libre Office – If you don’t use Google Drive, you can download this copy directly to your computer.
Remember, these are all monthly numbers. Make sure that the numbers you are plugging in are the total for each month.
Saving – Step Three
My budget doesn’t generally include money for very unpredictable expenses, like medical bills or car repairs. This is where saving is important. You can save your extra money per month in a separate account, or just leave it in your main account remembering that it is for important things that come up. Frankly, I find it much easier to keep it separate so that I know how exactly much we have on hand for emergencies at any time. It’s also much less tempting to spend that money.
If you have a regular amount of surplus every month, it’s a good idea to have some kind of automatic deposit into your savings account. Especially if you’re lazy about these things like me. In our family, a certain portion of our income gets automatically deposited into our savings account right away. This means our savings is steadily increasing so that when our check engine light goes on we don’t panic (OK I admit I panicked a little…especially when I was told the estimate to fix it).
If you’re one of the unlucky that doesn’t have extra each month, now is the time to figure out where you can cut back. I will write a bit about that in the future, but maybe it’s time to reconsider that Netflix subscription. It may seem a trivial amount, but the small expenses add up.