Christmas and New Year’s are over. Everything is getting back to normal. I’ve made it a point to talk to several friends about their holidays. Initially, all the answers were the same: “Oh it was great. It was so good to see
everyone.” But… Most of them also alluded to some stress because they’d spent too much money. I thought to myself, “Don’t they know how to make a budget?”
A budget is a tool that can save your finances now—or at least it could have—and in the future. It could have saved your finances now, if you had been using one—if sometime in the past you had prepared for the expenses of this special season. It can still save you in the future—if you plan and manage your money so you have funds for upcoming events.
Before I get started on “how to make a budget” let me tell you three things: (1) A budget is not an absolute (especially when you are just beginning to develop it). (2) In the beginning, most budgets are good guesses at best. (3) It will take time to make the adjustments that allow your budget and your lifestyle to be a good fit.
While I’m thinking about it, I should say that a budget isn’t a magic cure for your finances. It’s work. There will be a definite need make adjustments in both the allocation of funds and your spending habits—and that will take consideration, time, and dedication. As you develop your budget, you’ll have to be realistic. If you have to budget your way out of a financial mess left over from Christmas 2017, you’ll probably need to make conservative plans for Valentine’s Day 2018, maybe even Christmas 2018. And while that may not sound so great, the upside is that done correctly, your budget will let you prepare for the event and know how much you have available to spend.
Also, in some earlier posts, I strongly advocate making a budget and sticking to it. I still do—especially when you are climbing your way out of debt or trying to put together a financial safety net. So, when I say you’ll need to make changes to both your allocation of funds and your spending habits (or patterns), look intensely at your spending habits and most intensely at your spontaneous expenditures. Your budget should not be constantly changing just because “something came up.” That said, over time your life will change and your budget will need to change also. An example is the birth of a baby. Raising children takes the dedication of resources—time and money—and neither come cheaply. You know your spending habits will change after baby arrives, but budgeting well ahead of time can make the transition smoother.
First Things First
Why have you decided you need to develop a budget? That may sound like an odd question, but why are you taking the time and trouble to do this? Are you tired of being broke all of the time? Are you having difficulty meeting your bills? Are you constantly playing a game of financial catch-up? Do you want to save for a special vacation? Your child’s college education? Retirement? Or, any number of other things? What do you want your money to do for you? You’ll want to keep that purpose in mind when you start to develop your budget because it should be (or at least will eventually become) an important component: For many people it’s getting out of debt. But if for you it’s a fantastic vacation, you need to include that as a category in your budget. Otherwise, you’ll never get around taking it because you can’t afford to. Or…someday you’ll go ahead and take it—with disastrous financial consequences that could last the rest of your life.
Before you begin to put together a budget, you’ll need to think about your long term financial goals. You’ll also need a spending journal in which you track all of your daily expenditures. You do this first (before you even try to put together a budget) to track your spending patterns and find out what is important to you on a day to day basis. This is where you’ll find habits that are consuming your cash and need to be changed. Think about those five—or six—or seven dollar lattes. If you buy one every day, you’re spending somewhere between $25 and $50 a week, possibly upwards of $2000 a year. On coffee??? How far could that much money go towards meeting your financial goals? (And, some of us can’t stop at just one a day…)
Earlier, I said that most budgets begin as good guesses. Did you know you were spending that much on coffee—or if not coffee, something else? (We all have some habit that steals good money from ourselves.) A spending log or journal takes all the guesswork out of how your money was spent.
If you are faithful to keep your journal after you have your budget, you can compare the two to make sure bad habits are not slipping in.
So, a spending journal is an essential tool in helping you write a budget and then ensuring you’re keeping to it.
Decide what period of time your budget will cover. Will your budget be weekly, biweekly, or monthly? Because it most accurately represents their income and outlay patterns, many people use a monthly cycle. Think about it, in most cases you make your mortgage, rent, car payment, and credit card payments on a monthly basis.
The sample budget below is based on a monthly budget.
How To Make a Budget
Gather All of Your Financial Information
Every piece of financial information you can provide will be helpful: your mortgage, car payment book, old electric and credit card bills. Have your up-to-date spending journal. You’ll want your pay and any interest information, too. And don’t forget any tax payments that are not automatic deductions from your paycheck (usually property taxes).
Now is a good time to categorize the types of entries in your spending journal. You can start tabulating like entries and naming them: mortgage: car payment: fuel: credit card: gifts: recreation—you get the idea. You’ll have fixed expenses (regular bill payments) and variable expenses. (I’ll get back to these.)
You’ll need all this information to figure out your income/spending ratio for the month and to get an average on how much you spend in each category so that you can fund them.
List all of your income. That includes all the money that comes into your household: child support, alimony, part-time jobs, interest, and any other income you may have. Total them all up.
Note: You may have some accounts—generally investment/retirement—that pay interest or dividends that you cannot (or should not) easily access. You really can’t count those interest/dividends as part of your income for monthly budgeting purposes, but you will want to carry those accounts as categories in your budget so you can monitor their increase. (Also, any payments you make to those accounts have to be considered as expenses.)
We all have expenses, some are fixed and some are variable. List everything you spend money on: groceries,
recreation, car payment…everything. Any payments that are made quarterly, semi-annually, or yearly need to be divided by the appropriate number of months (4, 6, or 12), so they will be fully funded when due.
You’ll need to add up all your expenditures—first just to compare how much you’re spending to how much money you’re bringing in. Then you’ll need to break them down into categories which will fall into two major groups: Fixed Expenses and Variable Expenses.
Examples of fixed expenses would be your car payment, rent, and mortgage—anything you don’t expect to fluctuate. This would include items that you pay on a quarterly (semi-annually or yearly) basis, e.g. some people pay their garbage bill or newspapers quarterly. I pay my car insurance semi-annually.
Variable doesn’t mean unneeded. Those may be required expenditures. They are expenses for which you have no way of knowing for sure how much you will spend: things like gasoline, electricity, and maybe groceries—to name a few. For example, the price of gasoline sometimes goes up and down almost daily, and you can’t know for sure what the price will be tomorrow. Electricity: Extreme temperatures can and will affect your electric bill. How much you use, and the rate you pay can vary, even when you aren’t constantly adjusting the thermostat—and I suggest that you don’t. The same holds true for groceries. Some weeks you’ll find a good number of the items on your grocery list are on sale. When this happens you can stock up or save leftover funds for weeks when you’re not so lucky. Building up some surplus in your grocery (and other categories) can keep you from “robbing Peter to pay Paul” when an unexpected expense comes up. (Another choice would be to add any excess of funds to your emergency account. (An emergency fund should be included as a category in your budget.)
It’s likely you’ll also have recorded some expenditures for luxury and/or impulse purchases in your journal. Think lattes, or dinners out, or lottery tickets, or… (When you think about being short on funds or about long-term financial goals, managing (budgeting—perhaps eliminating) those purchases is essential.
Make Your Budget
After you have all of you income and expense information, it’s time to make your budget.
Basically, a budget is a categorized list of expenses that includes when they need to be paid out, as well as how much and when you will fund each of them. I like to fund each category weekly and at a consistent rate. You can believe me when I tell you it took me a while to get to that point.
What categories have you determined you have (or need to have)? Mortgage, Car Payment, Car Registration, Car Insurance, Car Maintenance, Fuel, Life Insurance, Medical Insurance, Emergency, Groceries, Gifts, Lunch Money, Tithing, Vacation, Clothing… The list can be broken down minutely or some categories can be combined—as in Automobile. Don’t worry if sometime (maybe sooner than later) you need to revise your budget categories and/or the amounts they are funded. For a time, it will be a work in progress.
Below is an image of what a typical budget might look like.
I think that grouping is important: Your fixed expenses should come first, followed by the variable expenses. Within each those groups you could alphabetize your categories or arrange them by largest to smallest funding commitment. You will find one of those or another method that works best for you.
Do you remember that I asked you why you wanted to make a budget? It might be to save money for a vacation or buying a luxury car. Or it might be paying off a particular debt… Whatever it is, make this your very first category. Right now, you may not be able to contribute much in the way of funding to it—or maybe you can? But give it something, regularly. Every time you review your budget, you’ll see the reason you’re “doing this.” (As you trim your expenses and build financial security, it should be possible to give it the priority it deserves.)
You now have the totals for your income and expenses. It’s time to make allocation of funds to your categories. How is your income/ expense ratio?
If you make enough to cover all your expenses…Great! In this case funding should be a fairly simple matter. This allows you some flexibility when it comes to “luxury” and arbitrary expenses, but you may want to limit these in order to contribute more to your financial security or long-term goals. (Funding towards the reason you decided to budget could also be accelerated.)
If you are spending more than you earn, you still have choices. You are going to have to cut back on your discretionary spending. You could also become stricter with how much you allow yourself for certain variable expenses—categories like groceries and gifts. Another choice would be to get a part-time job to supplement your income. It is imperative that your income be greater than your expenses in order to achieve your goals and financial security.
Review Your Budget
It’s important to review and update your budget periodically. Do it at least monthly. Weekly is better. I’d even recommend daily—at least at first. If you review daily, you’ll know exactly how much you have spent and your current financial standing.
To get the most out of reviewing your budget, you’ll need to use your up-to-date spending journal. It can reveal spending trends and help you maintain good financial habits.
In this post I’ve mentioned a spending journal several times… If you don’t know what a spending journal is it would be a good idea to read this article, but the simplest explanation is that a spending journal is a record of every expenditure you make. I’ve also said that a first budget is not much more than some good guesses. A spending journal provides insight into how you handle money and can be very helpful towards developing a realistic budget.
A budget is a set categorized guidelines to spending and saving. These guidelines are designed to save your finances now and in the future. It’s important to know why you are making a budget. Include that reason/goal as a separate category in your budget. If this is your first budget, be aware that you will need to make adjustments to both your spending habits and the amount of funds you allocate to the various categories. It’s OK to make the changes necessary to achieve your goals. In fact, as your life and financial responsibilities change, your budget will have to be adapted to fit them. Start budgeting now and prepare your finances for whatever “now” your future presents.